This investor emotions chart outlines the 14 stages investors experience during stock market cycles.
Investor emotions are real. Emotions affect our actions, often negatively, which hurts our ability to have enough money to retire comfortably when we want. That’s a big price to pay for something that can be remedied, so let’s do that.
It’s hard for most of us to recognize our emotions when we are experiencing them, hence the saying that hindsight is 20-20.
The inspiration for this chart came from my own investing experience over 40 years as well as my financial coaching work as an AFC® (Accredited Financial Counselor).
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How to Use the Investor Emotions Chart
Our goal is to invest based on a plan designed to accumulate enough wealth to fund our desired lifestyles, for life. We want clarity, math, and logic to be the driving forces for our investing, not emotions.
Use this investor emotions chart to recognize and address any emotions interfering with achieving your financial goals with the following three steps.
Find the Market Cycle Area
First, identify the area where the market cycle probably is now on the investor emotions chart below. We can’t know exactly where the market is now for sure until we are way past the current point so our goal is to spot the area where the market probably is.
It can be hard to know where the market is at times and most buy and hold investors don’t even consider this.
The following questions help identify the area at any given time.
- Has the stock market been rising or falling in recent years?
- Is it is most probable the market is in the middle of an upward or downward trajectory?
- Is it most probable the market is near the top of a long term cycle?
- Is it most probable the market is near the bottom of a long term cycle?
- What are investor emotions now? Are investors fearful, depressed, or thrilled?
Remember, we have to use probabilities when it comes to investing. This is true of investing returns, retirement planning, and also predicting the longevity of our retirement savings. It’s all based on probability.
Identify Investor Emotions
Second, after you have located the current market cycle area, explore the investor emotions experienced at that area in the market cycle. Read about what specifically might be triggering emotions from the list below the Investor Emotion Chart.
Explore Your Own Emotions
Again, it can be hard to recognize our own emotions when we experience them. Most of us aren’t encouraged to recognize our emotions as children, so this becomes a lifelong pattern.
Research on emotions and investing shows that addressing our emotions leads to better investing decisions, however. Therefore, it makes good sense to spend about a couple of minutes right now to see how you feel about your own investments.
It can be easier to see emotions in others than in ourselves. Observe how others feel about their own investments from a nonjudgmental place.
Friends and family often don’t discuss investments, unfortunately. Today, however, investing forums and social media platforms provide breeding grounds for the airing of investor emotions. Seeing the emotions there can help solidify your own observations.
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Investor Cycle of Emotions
Below are the feelings experienced throughout the investor emotions chart as stock market cycles occur. You may have experienced some of them yourself; I sure have.
OPTIMISM – Investors’ emotions begin with optimism as they invest in a stock position or a stock fund and they experience slight gains. Engagement with other investors often fuels optimism. Promotion about stock investing in general from outside parties is another common driver of optimism.
EXCITEMENT – Investors naturally begin to feel excitement after an investment begins increasing in price. The fact that passive money is actually being made can add to the excitement. Investor greed or other factors drive the stock market even higher as additional funds are poured into the markets.
THRILL – Once investments increase significantly in price, emotions intensify from excitement to thrill. Investors begin to feel even more confident in their financial prowess. They don’t see that much of their success can be attributed to the rise of the overall stock markets rather than their ability to evaluate an investment. Many eagerly track their investment success by updating their net worth often.
Financial futures start being planned around recent stellar investment returns lasting forever. Many investors lose complete interest in what goes up when stocks go down because it feels like stocks will rise forever. As a result, investors lower their cash portfolio allocation and sell defensive investments such as bonds to pour more even money into stocks. This influx of fresh capital drives stock market prices higher.
EUPHORIA – Investors have ridden the ride up and it feels amazing. Plans for early retirement look promising. Unfortunately, asset prices have reached their highest level, however, once euphoria appears. Over rational exuberance is another term for investor emotions at this stage.
Everyone loves stocks at this point.
Investment risk feels low because of success in recent years. Because asset prices are so high, however, stock market risk is high.
ANXIETY – Investors begin to feel some anxiety when asset prices dip below the usual price declines during the long-established uptrend. Investors have come to expect stellar returns from stocks, so this feels uncomfortable.
Encouraged to buy on the dip, many investors add funds at slightly lower prices since this has worked so well previously.
DENIAL – Emotions lead investors to deny that a serious market decline is probably in place. Talk turns to previous fast bear market recoveries, buying on the dip even more, “sticking with the plan”, and being long term investors. Major purchases are often delayed, however, just in case.
FEAR – Investors become afraid of more losses as they tally their losses off market highs, also known as drawdowns. Confidence has turned to fear.
Home purchases are delayed.
Emotional investing leads to selling stocks. This selling drives the now established bear market loss of over 19% even lower.
DESPERATION – All the plans made around previously believed sustainable high returns diminish. Investors sell more stocks; many investors call financial advisors and insist they sell stocks while individual investors liquidate stock funds.
Mutual funds are forced to sell to meet customer liquidations. This causes a huge volume of institutional selling causing more damage to stock prices.
PANIC – Emotional investment decisions lead many investors to sell stocks low even though stocks finally have much better valuations again.
The talk among friends, family, and the media turns to the devastating losses investors have experienced. Corporate profits are hurt from delayed consumer spending.
Jobs are lost. Retirement plans are delayed.
Yet investors can’t perceive their feelings seen on the investor emotions chart due to the pain from the high losses they have experienced. My analogy is not being able to read the label on the bottle when you’re in it.
CAPITULATION – The point of maximum pain is reached during stock market capitulation. Understandably, emotional investors throw in the towel and give up on stocks as a solid investment. A selling frenzy occurs to avoid even bigger losses. Investors simply cannot take the pain or the risk to their portfolios any longer.
DESPONDENCY – Investors never want to own stocks again. Stocks are selling at low prices, but stocks feel riskier than ever to investors who have given up all hope at this point. They don’t feel like stocks will go up again, ever.
The effects of the bear market hit all areas of the economy. This intensified investor emotions.
DEPRESSION – Investors understandably feel extreme emotional pain from their losses. They dwell over previous wealth made that has dissipated. They don’t know how or if they’ll ever recover, and many won’t.
Most investors had never really done the math on how a stock market crash might affect them so they were totally unprepared for their new financial situations.
HOPE – The market begins showing new signs of life. Investors feel hopeful again.
Many investors, however, continue to avoid the stock market and feel stocks are bad investments. Tactical investors take advantage of low stock prices relative to historical pricing and valuations. Even though they still feel nervous about stocks, they are hopeful.
RELIEF – Investors who bought low priced stocks have begun to see gains again. They feel relieved that stocks are a promising and rational investment after all.
Investors who stayed in the market start to see their net worth slowly increase off the bottom. Investors who bought undervalued stocks begin to see nice gains.
The cycle of market emotions begins all over again with optimism as shown at both the beginning and end of the investor emotions chart.
Investor Emotions Applications
Note that these same investor emotions don’t just apply to stock investments. They apply to alternative investments such as real estate or defensive investments, such as gold or commodities, but they are experienced by fewer investors.
Investor Emotions Chart Summary
One of the best skills investors can acquire is the ability to invest without emotions. It helps to know that our emotions around investing are reasonable and predictable even though they are usually harmful.
The saying that mystery loves company is true. It helps to know that as investors we’re not alone. Knowing that other investors go through these same emotions at various points in market cycles helps us invest from a place of confidence and skill instead of emotions.