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3 Emotions You Cannot Avoid During A Bear Market

Asian stock markets have been falling in the past month.

These declines are usually swift as selling begets more selling. A vicious cycle emerges as emotions run high. Understandably, investors would be swamped by a myriad of emotions and it can be a constant struggle to control these impulses. Learning how to deal with these emotions are important if we want to invest well. With that in mind, here are three common emotions which manifest themselves as markets decline:

Fear (Share Prices Spiralling Down)

Fear is the most dominant emotion during a market decline. As stock prices fall, investors worry that their investments could go to zero. Investors who are too fixated on a company’s share price may fail to realise these emotions may cause share prices to fall far below the company’s fundamental values. The solution to coping with this emotion is to objectively study the underlying business. If the company has strong financials and generates consistent free cash flows, the investor has much less reason to worry and should be able to sleep well at night.

Greed (In Wanting To Buy A Lot)

Greed arises when an investor sees numerous bargains dotting the investment landscape as valuations get slashed amid fearful investors sell en masse. Investors who are not selective in their investments may end up buying anything which appears cheap. The outcome is that he or she may end up with a portfolio of weak companies which may not be able to withstand a prolonged downturn. By being greedy, investors also risk running out of cash too soon. Should better bargains appear, the investor would be unable to take advantage. The solution is to do your research and to pace your stock purchases. By doing so, you can be more deliberate in your investment approach and have ample cash to take advantage of the opportunities that appear.

Despair And (Eventual) Capitulation

The emotions above relate to a feeling of desperation and helplessness as the stock market downturn drags on and prospects look increasingly bleak. An investor who invested a lot of money when the market was ebullient could well be sitting on a huge mountain of losses. As the market grinds lower, the investor’s growing unease may morph into despair. In my observation, this emotion eventually leads to capitulation, where the investor simply gives up and sells everything, usually at close to the nadir of the stock market downturn. The solution here would be to rely on social support. We can always seek out like-minded investors who may be in a similar predicament or spend time on other non-investing activities to keep ourselves away from the stock market. Money that is lost can always be earned back. In my book, health and relationships are far more important.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.