Consider this statement: the sharemarket is governed by fear and greed. Do you agree? And if that makes sense, how can you use these emotions to your advantage?
The secret for investors is to know which emotion dominates.
The time to be fearful is when the sharemarket is making front page news. Why? Because that’s the time when people think they can make easy profits.
Back in 2007 it seemed as though every week the sharemarket was reaching new record highs. It was a time when people entered the market and traded without really knowing the full story of how to play the sharemarket for profits.
Lately, even though we're all still seeing news filtering through about the ramifications and fallout from the GFC (Goldman Sachs anyone?) and the Resource Super Profits Tax, it seems to be the case that the finance segment on the news is all negative.
To me, that's the time — when it's a negative news day — for the smart money to think about investing in stocks.
Apart from the emotions of greed and fear, there are other signs you can look for that show you can still use the sharemarket’s strong foundations to build up your wealth.
One sign you can use is company profits. When profits in general start to increase across the board, it points to a steady, healthy rise rather than an opportunity for speculation.
Now that we've been through the GFC, it's only natural for investors and traders to be cautious. But that memory of fear is the very thing that may be standing in the way of sound logic and judgement.
There's nothing wrong with being fearful, as long as the timing of that fear is right. So embrace your fear.
Have you heard of a chart called the 'Cycle of Market Emotions'? Go into Google now and search for it — you'll see lots of examples. Basically this chart shows you that the sharemarket can be defined by fear and greed.
When the market is greedy, the emotions go from optimism to excitement to thrill to euphoria. It's at this height that you have the maximum financial risk.
Once fear sets in, the feelings go from anxiety to denial to fear to desperation to panic to capitulation to despondency to desperation. At this point, you get the maximum for financial opportunity.
Did you know that 90% of your portfolio's performance is not dependant on the individual stocks you choose? The real dependant for performance is asset allocation and more importantly, timing.
That means it's more important for you to choose assets in your portfolio at the right time, rather than the actual stocks themselves.
It's important for you to understand this cycle of fear and greed to ensure you do the right thing at the right time.
Do you see the market as a glass half empty or a glass half full? Is it time to be in stocks or only dip your toes in the stockmarket water?
During the last few recessions, the sharemarket recovered within two years of reaching its low.
Notice I said 'recessions' and not 'market crashes'. The 1987 market crash looked to be well on the path to recovery until it ran into "the recession that we had to have".
Why not think about index products which allow you to invest in a basket of products? Or E-minis which give you more highly geared exposure to the markets? And if you are worried about the Resource Super Profits Tax, consider an international Exchange Traded Fund which is traded on ASX but gives you exposure to international assets.
Generally, if you are looking for ideas on individual stocks, winners tend to keep on winning and losers tend to disappear.
I was looking at the sharemarket statistics from around two years ago. The three best performers on the ASX 200 back then were:
All three stocks had one thing in common. Can you guess? It was their link to strong demand from China.
On the other hand, the three worst performers were:
So, to be greedy when everyone else is fearful and fearful when everyone else is greedy really is the key here. While it seems like such an easy thing to do, when everyone is against you, sometimes it can be the hardest thing. So stay strong and use your head while everyone else is losing theirs!
Happy trading!
Julia Lee Equities Analyst Bell Direct Have you started trading with Bell Direct for just $15 a trade? Register now for free.