Maximum Financial Risk

Dear Jack,

I receive quite an amount of market commentaries from self-proclaimed experts in the financial markets.  Some I read, some I dismiss.  Niemann Capital Management, however, is one quarterly commentary I take the time to read.

In their latest commentary, they described the “Cycle of Market Emotions” as a market rises, matures, falls, bottoms, and eventually rises again.  The changing emotions associated with this ride are: optimism, excitement, thrill, euphoria, anxiety, denial, desperation, panic, surrender, depression, hope, relief, optimism, excitement, and so on.  Niemann’s point is that the moment of greatest financial risk is not investing when the markets (and emotions) are on their way down, but instead the moment of maximum risk is at the point of euphoria: when the markets have reached their top and everyone has deemed it the correct time to begin investing.

Conversely, the point of maximum financial opportunity is then, of course, when the emotions have reached depression, or at the bottom of the market when everyone has deemed equities dead.  But, being a long term, buy and hold portfolio manager that I am, I know that we can never tell when that bottom is going to be, and so we have to remain disciplined to invest, and keep investing, at all points in the market cycle as long as we’re able to, whether at euphoria or depression.  My point is to remind you, Jack, that you should never try to time these markets.  Instead, create a financial and investing plan, stick to it, and don’t make drastic changes in the midst of chaos around you.  I think one of the largest obstacles to overcome in investing success is our own emotions.  Till next time, Jack.



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