Fighting Human Nature By Steven Mayo
Plenty has been written since the U.S. election about what President Donald Trump will do, what he has done, the effect on the markets, the unleashing of “animal spirits” and reinvigorating the U.S. economy. This article is to do with managing emotions, keeping perspective and keeping one’s portfolio in line with the original goals. Considering, a year ago, the title of one of my articles was, “Haters Gonna Hate” in which I encouraged investors to take advantage of a decidedly bearish market and consider it a buying opportunity — we are now in an investment world with possibly too much love. Let’s relive last winter and how we felt about the markets: oil was still on its way down to $30; China’s economy and currency were a major concern; recessionary talk was getting louder and the media was very negative, telling investors to be cautious. There was much fear and short-term thinking.
Fast forward one year: the media is loving the market rally, the investment personalities are discussing the improvement of the U.S. economy, “anxiety” has been replaced by “comfort” and long-term thinking is okay. The market rally of 2016 was impressive, with only one short-lived market correction brought on by Brexit last June. The emotions people are expressing about the market brings me to an old list, last shared with readers three years go. The “Cycle of Market Emotions” — published in 1998 by AIM Trimark — outlines 14 emotions experienced by investors. Going up the emotional hill starts with “Optimism,” then “Excitement,” “Thrill,” then tops out with “Euphoria” (the point of maximum financial risk). We then experience a downward spiral from “Anxiety” to “Denial,” “Fear,” “Desperation,” “Panic,” Capitulation,” to the bottom with “Despondency” and “Depression” (the
point of maximum opportunity). “Hope” and “Relief” set in, moving us back to “Optimism.” This emotional cycle can apply to an individual stock, sector, or the markets as a whole. Here we are in 2017 with investors being fearful of missing out, which in itself is a sign be more cautious. The U.S. and Canadian markets have had outsized returns and I can sense “Euphoria” setting in. Going forward I believe investors should re-evaluate their portfolios by both position and sector, and look at those that are underperforming such as the Healthcare/ Pharmaceutical sectors for opportunities and — dare I suggest — considering trimming those positions/sectors that have had significant appreciation in the past year Please remember that volatility is a twoway street, corrections will occur, and to be prepared. As always we will end this article with a quote: “If you cannot control your emotions, you cannot control your money.” ~ Warren Buffett Steven Mayo is a Vice President, Investment Advisor with RBC Dominion Securities Inc. (Member — Canadian Investor Protection Fund). This article is not intended as nor does it constitute investment advice. Readers should consult a qualified professional before taking any action based on information in this article.
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Published on Mar 1, 2017
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