Some refer to the past decade as “the lost decade” due to market volatility that seemed to send many investors back to where they started.
It also marked tremendous volatility in confidence, with investors finding it difficult to believe in their investments and in the market itself. As a result, investors faced a new risk – allowing fear to stand in the way of capturing future market gains.
These concerns can vary in degree and change depending on the state of the market. The following stages reflect a common progression of mindset during most economic cycles, while suggesting a way to rebound from volatilities in returns and in confidence.
1. Herding: Confidence builds. Doing what everyone else is doing creates the feeling of safety in numbers.
2. Anchoring: Confidence is high. As investors fixate on a high-water portfolio value, confidence can hinder the ability to rationalize a normal cyclical decline.
3. Information Overload: Confidence is questioned. Investors cannot stop listening to news reports and opinions which, more often than not, feed into doubts and pessimism.
4. Straight Line Projections: Confidence wanes. Investors sometimes forget that most broad markets are cyclical and never go in a single direction forever.
5. Despair: Confidence is shattered. Conclusion that the financial markets, government oversight and the global economy are broken beyond repair.
6. Change of Strategy: Confidence returns. Investors begin to again feel positive about market participation when they are confident their strategy is built from knowledge gained through past downturns and reasonably promises to avoid similar outcomes.
