The Cycle of Investor Emotion

By Financial Advisor Hans Smith | June 3, 2022

Emotion can be a driver of poor investment decision making. Numerous studies show that investors tend to panic and bail out of stocks at just the wrong time.

Here is an illustration of the “cycle of investor emotion:”

Image representing the cycle of investor emotion. Euphoria is labeled point of maximum financial risk. Despondency is labeled point o maximum financial opportunity.

Note where the point of maximum financial risk and the point of maximum financial opportunity are located. Here is the key takeaway:

  • As markets climb, and average investor emotion builds from optimism to euphoria, a good investor should be less and less excited about forward investment returns.
  • As markets decline, and average investor emotion spirals from euphoria to despondency, a good investor should be increasingly excited about forward investment returns.

In other words, what the illustration is trying to tell you is: The riskiest time to invest is when the market looks safest, and the safest time to invest is when the market looks riskiest.

In hindsight bear markets and market corrections are widely considered buying opportunities for those routinely saving and investing into broad-based index funds. It almost never feels like that in real-time, however, and it's easy to get swept up in emotion. Maintaining discipline and purchasing various asset classes at discounted prices is an important piece of long-term investment success.

As legendary investor Peter Lynch once said:

”You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready. You won't do well in the markets. If you go to Minnesota in January, you should know it's gonna be cold. You don't panic when the thermometer falls below zero."


Get Started Today.

Please enter a first name.
Please enter a last name.
Please enter an email address.
Please enter a ZIP code.
Please select an asset level.
1000 characters remaining
Please enter a message.
DIFFERENTIATORS
GETTING STARTED
MATERIALS
How We Are Different
Understanding Your Financial Statement
Investing with Low Cost Index Funds
Pay Yourself First
Articles by Dan Cunningham
Vermont Financial Planning
Investor Resources
Quarterly Booklets
Why Use a Fiduciary Financial Advisor?
Financial Planning
Investment Tools
Financial Firm Comparison
The Investment Process
One Day In July in the Media
Local Financial Advisor
How to Switch Financial Advisors
Fee Calculator
Frequently Asked Questions
Types of Investors
Book Recommendations
Investment Advice for 2025
Square Mailers
SERVICES
Types of Accounts We Manage
Options for Self-Employed Retirement Plans
Saving Strategies
What to do When Receiving a Pension
Investment Tax Strategy: Tax Loss Harvesting
Vermont Investment Management
How to Invest an Inheritance
Investment Tax Strategy: Tax Lot Optimization
Vermont Retirement Planning
How to Make the Best 401k Selections
Investing for Retirement: 401k and More
Vermont Wealth Management
How to Rollover a 401k to an IRA
Investing in Bennington, VT
Vermont Financial Advisors
Investing in Albany, NY
Investing in Saratoga Springs, NY
New Hampshire Financial Advisors
INVESTING THOUGHTS
Should I Try to Time the Stock Market?
Mutual Funds vs. ETFs
Inflation
The Cycle of Investor Emotion
Countering Arguments Against Index Funds
Annuities - Why We Don't Sell Them
Taxes on Investments
How Financial Firms Bill
Low Investment Fees
Retirement Financial Planning
Investing in a Bear Market
Investing in Gold
Is Your Investment Advisor Worth One Percent?
Active vs. Passive Investment Management
Investment Risk vs. Investment Return
Who Supports Index Funds?
Investing Concepts
Does Stock Picking Work?
The Growth and Importance of Female Investors
Behavioral Economics
The Forward P/E Ratio
Donor-Advised Fund vs. Private Foundation

Vergennes, VT Financial Advisors

206 Main Street, Suite 20

Vergennes, VT 05491

(802) 777-9768

Wayne, PA Financial Advisors

851 Duportail Rd, 2nd Floor

Chesterbrook, PA 19087

(610) 673-0074

Burlington, VT Financial Advisors

77 College Street, Suite 3A

Burlington, VT 05401

(802) 503-8280

Hanover, NH Financial Advisors

26 South Main Street, Suite 4

Hanover, NH 03755

(802) 341-0188

Rutland, VT Financial Advisors

734 E US Route 4, Suite 7

Rutland, VT 05701

(802) 829-6954


v 2.4.69 | © One Day In July LLC. All Rights Reserved.