Great clip on Tech Ticker posted shortly ago that featured the 5 stages of investment grief. Aaron Task and his guest Diane Garnick of Invesco broke them down.
I think these stages relate really well with the cycle of market emotions (thrill euphoria, anxiety, denial, fear, etc.) and overall psychology is just as important if not more important than anything else in the market.
It is said that the market finally bottoms when bearish emotions are at their peak. People in a sense need to “give up hope” for the market and at that time it can be argued the bottom is near.
From Tech Ticker:
- Stage 1, Denial: “I should throw away my 401(k) statement without even opening it.” Or, “If we suspend mark to market accounting, everything bad will go away.”
- Stage 2, Anger: “Why did this happen to me? It is unfair that Wall Street benefited at my expense.” Or, “Why the hell is AIG’s bailout money going to its counterparties like Goldman and Deutsche Bank?”
- Stage 3, Bargaining: “Just give me one relief rally and I can make it all back and sell.”
- Stage 4, Depression: “The market stinks, no one is hiring anywhere. Why should I bother?”
- Stage 5, Acceptance: “It’s bad, but these things don’t last forever. I’m going to work on my career and portfolio to be prepared for the opportunities when they do come.”
Stage 5 is critical and really important to get to as quickly as possible. Last year I was actively trading as I normally did but midway through the year I started going through the above cycles. Lucky for me by August I was fed up and went nearly all cash (98%+) on August 12th, 2008. The 2%+ I’ve attained since in high yield savings accounts has been a phenomenal return compared to the market averages.
I suggest taking a look at your own portfolio and more importantly your own investor psychology. Do your feelings towards the market fit somewhere in the above five stages? If so the faster you can reach stage 5 and begin thinking of the future the faster positive change can be made.
Video Below (RSS and EMAIL subscribers click here to watch the video):
The 5 Stages of Grief, Investing Edition
Yahoo Tech Ticker, Mar 09, 2009 04:16pm EDT