Emotional Roller-Coaster of Investing
The thrill of going on a roller-coaster is really second to none in my opinion. Some people love that feeling and will pay money to experience it. Personally, I love roller-coasters and could go on all day talking about them, but when I’m investing, I don’t love them as much. Believe it or not, the feelings investors go through can be quite similar to the feelings you get while on a roller-coaster. This is because the stock market is made up of countless highs and lows and they can come at the most unexpected times. When you compare the two, there really are many similarities in terms of the emotions you feel at each point along the roller-coaster of emotions for investing.
Source: National Bank; The Cycle of Investor Emotions
How Does This Affect Investors?
What does the above graph look like to you? To me, it looks exactly like the first big drop on a roller-coaster, with a gradual climb to the top and a sudden steep drop to the bottom, which then recovers and goes back up again. Despite what I may be imagining when I look at this image, it’s not a roller-coaster drop (unfortunately), but a very important graphic for investors to familiarize themselves with. This graph marks common emotions investors feel during points of a normal market cycle, which is categorized by four phases:
1. Optimism, Excitement, Thrill and Euphoria
This is the honeymoon period after you make a decision to buy because you believe in the future profitability of the investment. Emotional biases make us prone to making buy decisions when stock market returns are positive and investor confidence is high. This phase is the point of maximum financial risk for investors, because there’s the largest potential for downside.
2. Anxiety, Denial, Fear and Desperation
Just like on a roller-coaster, you can’t go up forever, and what goes up will eventually come down again. This is the point that investors will start to second-guess their decision because they see negative returns and money being lost.
3. Panic, Capitulation, Despondency and Depression
This is the point where confidence is low and you may consider selling your investments in fear of future losses. For a typical market cycle, this marks the point of maximum financial opportunity because valuations are low, which creates greater chances for finding undervalued investments.
4. Hope, Relief and Optimism
When prices begin to rise again, investors feel relieved and optimistic at the prospect for future gains in their investment. People will have a more positive outlook and they will regain confidence in their choices.
How to Manage These Emotions as an Investor
Awareness is key. That’s why I’m writing this post, because you have to be aware of your emotions first to understand why you’re feeling the way you are. Having clearly set goals and objectives will help you stay true to the decisions you make if you’re thinking long-term and can ignore short-term volatility.
New investors likely haven’t experienced the natural ups and downs of a market cycle yet, so seeing some negative returns can be scary. Investing in the stock market does inherently mean you’re willing to accept some volatility, and fluctuations in your returns over the short-term. You’re rewarded with increased expected returns by taking on more risk, but to truly capture high expected returns, typically you will need to keep a long-term mindset for stocks.
How did the TSX do in 2023?
To many investors' surprise, the TSX performed well in 2023, but also went through plenty of fluctuations. It’s not hard to see how applicable the market cycle of emotions is to actual market returns. When looking at monthly returns in 2023 for the TSX, each month told a different story. Things got off to a hot start last January, and just as fast as it went up, prices dropped. The TSX reached its lowest price level in October, but ended 2023 with huge rallies in both November and December. It’s very difficult to accurately predict at what point prices will be at their lowest and when they will rebound again. This reiterates the importance of having a long time horizon when investing in stocks and setting clear guidelines for your investments.
Source: QuoteStream Historical TSX Monthly Returns
Where did the TSX End 2023?
Despite six months of negative returns, the gains significantly outweighed the losses, propelling the TSX to return 8.12%* for the year.
*Calculated by taking the closing values of the TSX on the last trading day of 2023 and 2022, then dividing the difference of those numbers by the closing value of 2022 to get a simple rate of return*
= [($20958.44 - $19384.92) / ($19384.92)] * 100 = 8.12%
Source: QuoteStream Historical TSX Daily Returns
Source: QuoteStream Historical TSX Monthly Returns
Blue bars represent a month with a positive return and orange bars represent a month with a negative return. The graph begins as of the first trading day of the year and ends on the last. Each month’s return is continually added or subtracted from the previous, with the base value being the opening price on the first trading day of 2023. The percentage returns on the left side of the graph represent total returns achieved since the start of the year, while the percentages on-top of each coloured bar shows that corresponding month’s return.
Volatility is inherent in the stock market and to achieve the high expected returns that stocks can give, there is a degree of risk and volatility you must accept. Constantly checking how your investments are doing will make you more prone to being emotionally attached to the short-term outcomes, which can cause anxiety and fear when returns are negative. These feelings can cause you to rethink your investing goals in an attempt to protect from additional losses. It’s important to know that historically, stocks do not continue to go up at a linear pace, and prices fluctuating up and down are part of a normal market cycle. 2023 was an especially bumpy ride, but sticking with your goals throughout market volatility is sure to help you deal with the emotional pains of negative returns.
I recently passed my CPH course, to go along with my CSC certification obtained in November. For most people who aren’t familiar with financial jargon, completing these two courses fulfill the registration requirements for securities licensing in Canada. Now hold your horses because although this is great news, I still have a mandatory 90-day training period before taking orders for securities trading or advising. For most of this past year, I have been working towards obtaining my registration to become an associate investment advisor, and it’s exciting to see this goal come to fruition.
For all of our clients, I would like to thank you for your continued support over the past year and patience in this long process. For any prospective clients, please don’t hesitate to reach out with any inquires. Messages can be sent by clicking on the 'Contact Us' button below and all will be responded to promptly.
In addition to (hopefully) providing valuable information for all of you, I write these to further my own learning in finance and any feedback is welcomed and appreciated.
All the best,
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
This information has been prepared by Mike Holyk who is a Senior Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisors can open accounts only in the provinces in which they are registered.