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The Cycle of Fear, Greed, and Shrinking Returns

The Cycle of Fear, Greed, and Shrinking Returns

$100 is on the table, and you have a choice. You can choose to receive $50 or flip a coin. If you choose the coin toss and get heads, you get $100. If it’s tails, you get nothing. What do you do? If you’re like most folks, you’re probably going to take the $50. It’s a sure thing.

Now, what if this were a game of losses? What if you stood to lose $50 out of the gate? And what if the coin toss meant losing $100 with heads or losing nothing with tails?

What would you do then? Here, most folks choose to flip the coin. And even though they’re making a different decision — flipping the coin and taking the risk, instead of going with the known option — their reasoning hasn’t really changed. In both cases, the choice is largely based on fear, the fear of losses. That fear is natural. So is a related emotion, greed.

In fact, fear and greed are behind a lot of our financial choices and, often, not the best ones. It doesn’t matter if the markets are bullish or bearish…greed and fear can easily creep in and disrupt our ability to make sound, long-term decisions. That’s how we lose big — and how we get in the cycle of buy high, sell low, and lose BIG.

In this newsletter, we look at How $25 Trillion+ Has Been Lost to Greed & Fear in 35 Years.

Whether or not you’ve had a front seat to market booms or busts, the reality is any of us can get anxious, afraid, or even greedy with sudden shocks and surprises in the markets. We can take some simple steps to avoid the fear/greed cycle and do the following:

  1. Set some long-term financial goals.
  2. Get some distance and avoid checking your portfolio day to day.
  3. Take your time and think things through.

It’s prudent to check in with the folks we trust, especially when it’s time to make major money moves.

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