Investors don't know whether to be scared of another market plunge or of missing out on more of the rally.
Even by the standards of the stock market, the past few months have been a rollercoaster.
Scratch that -- six months ago investors were on a ghost train, scared witless by fear that economic life as we know it was ending. The FTSE 100 index touched 3,512 on 3 March but for many, whether it hit 3,000 or headed even lower had become irrelevant. Without a viable banking system, our share certificates would soon be good only for starting fires in some Mad Max style future.
Yet here we are in August with the index up a third and sentiment completely shifted. Commentators rarely talk today about a resumption of the bear market. Fear still reigns, only now we're told it will cause the market to go higher as it draws in those on the sidelines who are afraid of missing out.
When will the fear of foregoing gains overcome the fear of loss for the last bearish investor? When the FTSE 100 is at 5,000? At 6,500? In who knows how many years' time when the FTSE tops 10,000 and another share slump looms?
You might end up with a nest egg by investing this way but you're certainly banking on an ulcer.
Fear does not compute
Fear is a dangerous emotion for a stock market investor.
Of course, there is an argument all emotion should be stripped from investing. I say we're human beings, not robots, and that turning ourselves into Daleks -- tweaking their catchphrase to "Accumulate! Accumulate!" -- is an impossible task.
Besides, fear can deliver the push that leads us to getting to grips with our finances -- fear of an impoverished old age, say, or fear of never getting out of debt.
An emotion-less investment droid might conclude it was logical to put money aside for the future when its joints get rusty, but fear of 20 years of rattling about on a state pension can bring us flesh-and-blood beings to the same conclusion, too.
Scared of shadows
The trouble is our emotions -- particularly the ones designed to help us in flight-or-flight situations -- are more often about the here and now.
This emotional short-term focus makes sense, in terms of evolution. Trudging through the Ice Age, the threat of being eaten by a wolf was of more pressing concern to our ancestors than getting emotional about some decades away event that they were hardly able to prepare for. Indeed, our core emotions probably pre-date our homo sapiens biology: wolves get frightened, too (the sight of 20 hungry homo sapiens armed with spears and thirsty for revenge will do it).
The trouble is investing has nothing to do with the short term, unless you're a day trader (in which case you should get ready for more emotions, such as sorrow and regret). As a 30-year old investing for your old age or a 50-year old investing for your daughters' university fees, whether the market goes up or down tomorrow should make almost no difference.
I say 'almost' because, if anything, falling markets should make you want to beg, borrow or steal (only from your own holiday fund!) more money to invest.
This is because investing is about your expected future returns, not what has happened since you invested -- let alone what happened while you didn't. And lower entry prices increase the chances of a positive outcome.
The FTSE 100 index is still more than 30% below its peak in 1999. The market has moved quickly in recent months but it could rise nearly 50% from here before it touched that peak again.
Add in a 4% yield and we could be looking at double-digit returns for several years to come just to get back to the heights of 1999, even after the recent rally.
The fear-foiling strategy
There's nothing magical about these numbers: The FTSE 100 was over-valued in 1999 and it was at least fully-valued at the start of the recent bear market, given how illusory much of the debt-fuelled profits were.
The point though is all those events are in the past, so there's no point fearing them now.
If you had a crystal ball, it would have paid to be fearful in 1999 and again in 2007. But there's no use being frightened of stock market crashes that have already crashed.
Arguably the markets were right to fear economic meltdown in October 2008 and again in March 2009. Yet given that particular risk has effectively abated, as indicated by the return to relative normality of credit spreads, the bounce back since then has been rational, too.
Global trade is only now coming out of steep recession, but that's nothing unusual -- it's called the business cycle for a reason. Indicators such as the gilt to equity yield ratio suggest the FTSE All-Share may still be cheap, although no buy signal is foolproof.
The best strategy to avoid all this emotional turmoil is to invest the bulk of your money via regular payments into a low-cost index tracking fund. It's the closest we can get to emotion-less, robotic investing.
Many of us, however -- myself included -- fancy ourselves smart enough to risk at least a portion of our money with hands-on investment.
We invariably look to our hero Warren Buffet's famous quote: "Be fearful when others are greedy, and be greedy when others are fearful."
Buffett's take on fear has been repeated to the point of cliché. Yet the fact that he is still in business despite 'everyone knowing' his well-worn modus operandi proves that when it comes to exploiting fear in the market, most people are simply too scared to do it.
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