Why I don’t fear a market crash - Andrew Baxter
Emotions are the key driver of the stock market. Yes,
fundamentals and economics are the “Why” prices will rise or fall, but
Fear and Greed are a here and now action that causes prices to fluctuate
despite the underlying factors of a company, commodity or market.
Hence, the reason why Technical Analysis has become such a prized and
popular method in modern day investing.
It’s not a market crash that causes investors to lose their wealth. Ok, so a 30% fall in the markets within a few days wipes out tens of Billions of dollars in value, but unless you sell stock and exit the position/s, you have an unrealized loss due to the crash. And in most “Flash Crash” situations, the markets rebound very quickly, resulting in stock positions bouncing back to previous crash levels, if not within weeks, then within a couple of months.
What loses wealth for stock market investors is holding onto stocks during an extended Bear market, and then selling at the bottom. Markets move in cycles, even though over the long-term they trend upwards, there are periods where a weak economic outlook results in falling stock values. This can result in long periods of time where the stock market declines, or at times, produce quick market crashes where fear drives selling pressure.
Studies of emotional reactions to market cycles have been conducted for decades. The attached image depicts the typical emotional rollercoaster ride that investors go through. Pay particular attention to the emotions whilst the markets are falling. Fear, Desperation and Panic are the usual reactions after stock markets have plummeted and the investor has seen their stock values declining at a rapid rate. The average investor doesn’t realize that there are warning signals at the top of a market prior to a major crash. We can take a look at any of the key panic periods, and note that the markets had topped well before the actual event.
It’s not a market crash that causes investors to lose their wealth. Ok, so a 30% fall in the markets within a few days wipes out tens of Billions of dollars in value, but unless you sell stock and exit the position/s, you have an unrealized loss due to the crash. And in most “Flash Crash” situations, the markets rebound very quickly, resulting in stock positions bouncing back to previous crash levels, if not within weeks, then within a couple of months.
What loses wealth for stock market investors is holding onto stocks during an extended Bear market, and then selling at the bottom. Markets move in cycles, even though over the long-term they trend upwards, there are periods where a weak economic outlook results in falling stock values. This can result in long periods of time where the stock market declines, or at times, produce quick market crashes where fear drives selling pressure.
Studies of emotional reactions to market cycles have been conducted for decades. The attached image depicts the typical emotional rollercoaster ride that investors go through. Pay particular attention to the emotions whilst the markets are falling. Fear, Desperation and Panic are the usual reactions after stock markets have plummeted and the investor has seen their stock values declining at a rapid rate. The average investor doesn’t realize that there are warning signals at the top of a market prior to a major crash. We can take a look at any of the key panic periods, and note that the markets had topped well before the actual event.
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