Emotions and Market Cycles

Businessman and watering pot  (path in side)

Emotions and Market Cycles

We know that emotions, not math are the primary source of investor return when it comes to individual investors.  It’s not the allocation, it’s not a checklist, it’s the narrative or story that people tell themselves.

The following picture is a great example of how emotions impact the investment outcome.  It usually gets trotted out when markets are making lows.


With the market making new highs, the media pundits are now playing the FOMO card – fear of missing out.  Where were they when the S&P bottomed at 666?

I’m not saying the market is correcting tomorrow, but with asset prices being inflated by central bank activities, markets cresting at new highs- perhaps we should check in with our emotions and understand the risk/return dynamic of buying into the market today.

Valuations are high:

Shiller PE Ratio

Shiller PE ratio for the S&P 500.

Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 — FAQ.


Margin debt is high:


Are our emotions high?

I think it’s prudent to check in with the risk/reward dynamic and perhaps take some profits or hedge.  The old adage of don’t fight the Fed creeps to mind but with the cost of buying puts pretty cheap, maybe we stay long but with some insurance, because market irrationality can last a long time.

That’s it from me and bye for now.

Damien Lanyon

Damien is the founder and owner of Lanyon Advisory Services and has a extensive knowledge and experience in financial planning and wealth management.

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