When you were in high school, did you ever find it frustrating that the fate of your Friday nights hung entirely on your parents’ moods?
Take borrowing the car, for example. You’d ask your parents to borrow the car for a Friday night, and the answer would often depend on your parents’ moods instead of the circumstances. You were planning on spending the night watching an age-appropriate movie with some well-behaved friends. You gave the names of the kids along with their parents’ names and contact information to your parents if they wanted to corroborate your story. You planned to come home before midnight and promised to fill the tank the next day. Yet, despite your pleadings, sometimes the answer was “no,” and you were powerless to change their minds.
Isn’t it frustrating to be held hostage to someone else’s mood or emotions? Yet, isn’t that how investing in the stock market is?
Imagine if there was a meter in your house growing up that measured the mood your parents were in. Would it probably influence your actions?
Well, did you know there’s a gauge that measures the state of investor emotions in the stock market, and many investors base their decisions on this meter?
The Fear & Greed Index, put out by CNN Business, is used to gauge the market’s mood. Many investors are emotional and reactionary, and fear and greed sentiment indicators can alert investors to their own emotions and biases that can influence their decisions.
The Fear and Greed Index mirrors investor sentiment and emotions.
Here is a timeline of investor sentiment over the past year:
Investor sentiment has been on a roller coaster ride the past year. Truthfully, it’s like this every year, and it’s reflected in the stock market as the Dow rises and falls with investor sentiment.
Don’t you value predictability when you plan – in life, in business, in finances?
When planning a beach trip, why do you check the weather forecast? Because predictability allows for more confident planning. If you see seven straight days of sunshine, you could be fairly confident that you’re not picnic is not going to be rained on, and you base your planning on that predictability.
If you invest in the stock market, based on the charts above, how is it even possible to make any financial plans with so much uncertainty and unpredictability? It’s not possible, making investing in stocks a guessing game – speculation.
Because of the unpredictability of the equity markets, the average investor gets caught up in speculation and playing the timing game – timing investments to beat the market. Everyone is trying to buy low before everyone else and sell high before a dip. Investors constantly scan the internet forums, social media, and financial news for an edge.
The problem is that everyone else is doing the same thing so that nobody can ever have an advantage. Some investors get lucky once in a while, but nobody can time the market consistently – not even professional fund managers.
The most common sentiment evoked from playing the timing game on the stock market is frustration and regret – not elation.
Instead of “Woo Hoo!” most investors are often caught muttering a variation of one or more of the following utterances:
“If only I had bought it sooner?”
“If only I had sold sooner.”
“If only I had held onto it longer.”
While stock investors are held hostage to the whims of widespread investor sentiment, savvy investors are drawn to predictability.
Savvy ultra-wealthy investors don’t follow the Fear and Greed Index because they don’t let investor sentiment affect their investment choices. They’re not affected by irrational market drivers like investor sentiment, internet hype, and social media buzz because they do not invest in volatile speculative investments.
They value predictability.
Savvy investors value predictability because predictability promotes planning. When planning for financial independence, the ultra-wealthy want to be able to depend on reliability and consistency – two traits the equity markets can’t offer.
That’s why these savvy investors are drawn to private alternative investments not correlated to the broader markets and not tied to widespread investor sentiment. By relying on alternatives such as private real estate with a smooth, consistent upward trajectory rather than the volatile, rocky up and down equity markets, savvy investors can plan around consistent cash flow and appreciation and project returns and wealth with confidence.
Why put the fate of your portfolio in the hands of investor sentiment? Why not consider alternatives for consistency, reliability, and predictability?
