Cycle of investor emotions
Ride the wave
When things are great, we feel that nothing can stop us. And when things go bad, we look to take drastic action. Because emotions can be such a threat to an investor's financial health, it is important to know how to keep your head above water in the cycle of investor emotions.
You can't stop the wave, but you can learn to surf
Click on an emotion to learn more about how it affects investment choices.
Investors typically start with optimism, which sits at the inflection point on the emotional upswing. We commonly expect things to go our way, or we expect to receive a return for the risk of investing. We go into the markets because we believe we will be able to grow our wealth through our investment choices.
When markets move in the direction we had hoped to see, we start to get excited about the possibility of even greater gains.
When the momentum continues, we find the experience thrilling and begin to anticipate even higher returns.
This is the point of maximum financial risk.
As markets reach the top of the cycle, investors may experience euphoria. We start to think that we made a smart move to invest when we did, and we believe that the good times will continue unchecked. We may even fool ourselves into believing we can tolerate higher levels of risk—and may begin to trade more frequently or invest in riskier asset classes.
The second phase of the cycle occurs when the market starts to turn. At first, we watch to see if the downturn is just a blip. We may believe that things will improve shortly and therefore hang on to our investments.
As the markets continue to fall, denial gives way to anxiety. Investment values decline perhaps even to the point that we begin to see losses. Reality sets in that maybe we weren’t as smart as we thought.
When market losses accelerate, real fear kicks in. Some investors may then turn defensive
and switch out of riskier equities to more defensive equities or other asset classes such as bonds.
In the third phase of the cycle, the realities of a bear market come to the fore and an investor may become depressed and desperate.
Many of us missed our chance to take profits, and we may try to get our positions back into the black by either selling our worst-performing investments or moving into securities that don’t fit our risk profile. When that doesn’t work, panic sets in.
At this point, we feel at the mercy of the market and some of us pull out altogether, abandoning investments at precisely the wrong time.
This is the point of maximum financial opportunity.
Those who remain invested may become despondent and wonder whether they should ever have invested their hard-earned money in the markets.
In the fourth phase of the cycle, investors may experience some skepticism when markets start to rise. We often have a sense of caution or worry, wondering if market growth will last.
Though investors are hopeful about continued market increases, we may still be reluctant to invest money—even at a point when prices are still relatively low and opportunities are attractive.
Eventually we come to realize that the market is recovering. For those investors who let their emotions rule their investment decisions, the market cycle can begin all over again.
We've ridden these waves before
Hover on stages of past market cycles to learn about historical market returns and to provide perspective about the emotions you're feeling now.
Investors have been optimistic, excited, thrilled, and euphoric in past market cycles
Market Cycle #1: Nov 1971 - Dec 1972
• Inflationary pressures, Productivity improvements • Rapid corporate earnings growth • Introduction of paperless technology
Market Cycle #2: Aug 1984 - Aug 1987
• Credit boom • Strong world economic growth
Market Cycle #3: Apr 1997 – Sep 2000
• Tech boom. Investor exuberance. • Emergence of ‘new economy’ sectors
Market Cycle #4: Jun 2005 – Jul 2007
• UK house prices hit highs • Credit boom • Higher interest rates
Market Cycle #5: Jan 2015 – Feb 2020
• Return to full employment in U.S. • Optimism rises with U.S. tax cuts • Trade war creates volatility in 2018 • 2019 Fed rate cuts extend the cycle • Virus originating in China is identified as COVID-19
Market Cycle #6: Apr 2021 – Dec 2022
• Full employment returns: demand for employees outweighs supply of workers • Cryptocurrencies, SPACs, meme stocks and NFTs reach peak levels of speculation • Fiscal policies and stimulus checks continue the momentum of economic recovery coming out of COVID
Investors have been in denial, anxious, and fearful in past market cycles
Market Cycle #1: Jan 1973 – Jan 1974
• OPEC Oil crisis – crude oil prices tripled. • Credit squeeze • Property company failures
Market Cycle #2: Sep 1987
• Irrational shareholder sentiment • Peak of overinflated stock values vs historical PEs
Market Cycle #3: Oct 2000 – Sep 2001
• Tech bubble burst • September 11 terrorist attack
Market Cycle #4: Aug 2007 – Sep 2008
• Credit crunch. Sub-prime mortgage crisis. Collateralized debt obligation (CDO) failures • Lehman Brothers declares bankruptcy
Market Cycle #5: Late February 2020
• COVID-19 virus spreads worldwide • Global stock markets fell late in February 2020 due to a significant rise in the number of COVID-19 cases outside of mainland China
Market Cycle #6: Jan 2022 – Dec 2022
• Federal Reserve begins interest rate hiking regime • Inflation hits 40-year highs • Technical recession occurs with two quarters of negative GDP • Job market remains strong as unemployment is near all-time lows
Investors have been skeptical, hopeful, and relieved in past market cycles
Market Cycle #1: Feb 1974 – Nov 1974
• Global recession • Extended bear market
Market Cycle #2: Oct 1987 – Nov 1987
• 1987 Global stock market crash
Market Cycle #3: Mar 2002 – Feb 2003
• Reduced global economic growth forecasts • Extended bear market • Corporate accounting scandals
Market Cycle #4: Oct 2008 – Feb 2009
• Global financial crisis • European and U.S. recessions. Negative real GDP reported for major developed countries in Q4 2008
Market Cycle #5: March 2020
• COVID-19 is classified as a global pandemic • Travel and commerce begins to be restricted worldwide as COVID-19 pandemic eventually forces most of the world population into quarantine
Investors have been depressed, panicked, capitulating and despondent in past market cycles.
Market Cycle #1: Dec 1974 – Jun 1975
• Stock market recovery despite recession
Market Cycle #2: Dec 1987 – Dec 1989
• Stock market recovery as value hunters sought to buy quality stocks cheaply
Market Cycle #3: Mar 2003 – May 2005
• Geopolitical uncertainty • Refocus on world economic fundamentals • Boom in resources in response to industrialization of China
Market Cycle #4: Mar 2009 – Dec 2014
• Global stock market recovery • Deleveraging, slow economic growth
Market Cycle #5: Mar 2020 - Mar 2021
• CARES Act was signed into U.S. law, sending Economic Impact Payments to qualifying U.S. citizens • Global economic recovery begins • Supportive central bank policies • Global COVID-19 vaccine rollout
For illustrative purposes only. Latest month-end data as of December 31, 2022. Market cycle returns calculated using Ibbotson U.S. Equity Total Return Index from 1971-1978 and Russell 3000
© Index from 1979 to 2022. In USD. Source for market events: Russell Investments. Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.