A Fear-Driven Investor

Greed is actually a variant of Fear – the fear of missing the move higher, fear of leaving profits on the table, fear of losing clients, fear of lower income, fear of losing your job. Hence, when most people say that Fear & Greed drives the market, they are really saying FEAR drives the market in both directions.
Barry Ritholtz, The Big Picture Blog, August 2011 

5 Year Growth of $10,000 in the S&P 500

Source: Morningstar.com

This March marked a dubious anniversary – three years prior, the stock markets bottomed out during the Great Recession. Since 2009, we have witnessed the resilience of stocks and US corporations. 

Along with a recovering stock market, the past five years have been a major test for investors. It goes against primitive human coding to stand by idly as losses pile up. We know – we’ve been there as both professional and personal investors. 

Recommendations to stay disciplined and follow a process are enough for many people. Small tweaks based upon a changing environment or personal situation help to keep skin in the game. Many investors have been rewarded by this discipline, recovering from market losses and adding to net worth with carefully planned saving and investing along the way. 

For an unfortunate group of investors, though, the fear takes over. Investments become too painful at just the wrong moments (September 2008 through March of 2009). Once out of the market, sitting comfortably in cash with some locked-in losses, the need for perfect timing makes an investor gun-shy. As losses become gains for indexes and markets, the “timing” investor is paralyzed. Perhaps they’re waiting for an all-clear sign that will never come.

Markets often accelerate ahead of good news, but it is that late good news that may finally push the fearful investor off the sideline, resulting in them buying high. An ongoing cycle of bad timing is initiated. Author and Financial Planner Carl Richards has coined this very real syndrome “The Behavior Gap”.

Have you found yourself out of the market and are considering getting back in because things are looking better? If so, be careful! You are not alone in selling when things were down, but because you did, you may be more likely to repeat this behavior the next time the going gets tough. 

After you’ve diagnosed your fearful behavior when markets are down, take a look at your actions when markets are up. Do you change your behavior because of fear’s twin greed?

In our upcoming blogs, we share advice on how to avoid “The Behavior Gap”.


The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Past performance may not be indicative of future results. All illustrations are hypothetical and should not be relied upon as investment advice.  The S&P 500 is an unmanaged index of 500 widely held stocks largely considered representative of the U.S. stock market.  Investors cannot invest directly in an index.