Fear and Greed: An Investor’s Worst Enemies

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Over the past two years, investors have had to manage their psychological biases amidst market, economic, and political uncertainty. Since 2020, the divergence of asset price performance from fundamentals has never been starker. As a reminder, stock prices were surging higher in the spring and summer of 2020 despite double-digit unemployment and closures of large economic segments. It was not easy to be bullish with news like the New York Times front page below.

The stock market bottomed the week the headline above was published. Since then, the S&P 500 has more than doubled. Those investors who could silence their fear and focus on technical signals and fiscal and monetary stimulus prospered.

Simultaneous feelings of fear and greed were overwhelming and detrimental to investors over the past two years.

As we look ahead, those same emotional biases will hinder investors. In this piece, I examine two biases that often handcuff investors and push them to make the wrong decisions at the wrong time. My intention to make you aware of these subconscious forces is to help you manage both fear and greed and, ultimately, your wealth.

Availability bias – fear

Proposals for new nuclear power plants often come under resounding negative pressure from local communities. According to Britannica, the phrase NIMBY (not in my backyard) was coined because of the “threat” of new nuclear power plants.