The Real Reason Retirees Shouldn’t Care What Donald Trump Says About the Stock Market
Each time the markets surged since President Donald Trump’s election, he has taken credit. “The stock market has smashed one record after another, gaining $8 trillion in value,” Trump said. “That is great news for Americans’ 401(k), retirement, pension, and college savings accounts.”
But what of the recent volatility? Well, Trump said the stock market was “making a big mistake” after a record-breaking selloff on U.S. exchanges Feb. 5, 2018. Unlike in the “old days,” reporting “good news” about the economy now causes the stock market to go down, Trump tweeted.
All the hype and recent market volatility is especially nerve-racking for those in retirement or close to it. It’s important to recognize the stock market goes in cycles, and investor emotions also follow a cycle. This can be a dangerous thing, as investors can be led to make impulsive decisions.
Here we’ll look at eight common emotions people experience as the market fluctuates. These human emotions could drive financial markets as much or more than do market fundamentals. In all, remember that media hype or the president’s pronouncements can be a distraction. Instead, a steady investment strategy and a well-balanced portfolio may very well remain your best plan for retirement.
- “This rally is real. I’m in it for the long haul.”
This is a stage of rising prices as new capital is being invested. It’s when the market has been in a sustained uptrend for many months and the economy is in recovery. The market has a positive outlook, and therefore many of us are comfortable investing money at this time.
In the Optimism stage, investors see the market as undervalued, so we become increasingly optimistic that stock prices will continue to rise. As a result, buyers tend to outnumber sellers during this stage.
Next: Time to get more serious
- “Yes, I was correct. Time to get fully invested.”
This stage is quick to follow after some initial success. Having seen some of our initial investment strategies work, we begin considering what our market success could enable us to accomplish. We look for new ways to achieve even more.
This may be an important time to make sure your retirement portfolio remains balanced and not get caught up in the excitement by making impulsive decisions.
Next: We start to delight in our winnings.
- “I will buy more on margin. Gotta tell everyone to buy!”
As the market continues to accelerate, the Thrill phase begins. Investors are delighting in their wins. Their confidence is through the roof as they see their profits increase substantially. At this stage, we may see positive returns and congratulate ourselves for making smart decisions.
Next: When initial excitement turns to euphoria
- “I am a genius! I’m headed for early retirement.”
There is a feeling of euphoria when returns are so favorable. At this stage, wins come quick and fast, providing easy profits and boosting investor sentiments to dizzying heights. But beware: This is also the point of maximum potential risk for your portfolio. Don’t begin to ignore risk and expect every trade to become profitable.
Next: We can’t stay on top forever.
- “We just need to cool off for the next rally.”
This is the stage when the market stops meeting our new lofty expectations garnered in the Euphoria stage, and things begin to turn. As investors, we may feel a bit smug with our investments at this stage. The danger here is as market players, we may be ill-prepared for the inevitable reversal. Such a turnaround could be bigger and quicker than many of us want to believe.
Next: Confidence starts to flounder.
- “This dip is sure taking longer than expected.”
For the first time in the cycle, the market moves against us. As our investments start to lose value, our confidence is shaken and we feel anxiety. The important factor to remember at this stage is that it’s perfectly normal for stocks to go down. It’s the reason you need a balanced retirement portfolio to begin with.
Next: A defensive reaction
- “My investments are with great companies. They will come back.”
As the value of your investments continues to decline, anxiety turns to denial. Here, many investors start to act defensively. They may consider switching out of riskier assets to traditionally safer alternatives such as bonds.
However, denial often causes investors to hold onto investments. We generally do not know how to respond. We tend to deny we have made poor investment choices or that things will not improve shortly.
Next: Defensiveness turns to real panic.
- “My investments feel out of control. I need to get out.”
In this stage, the realities of a bear market come to the forefront. Investors may despair at the amount of money they have lost. Many panic and withdraw everything from the market, afraid of losing what’s left. Those who stick with it often become despondent and wonder if their investments are ever going to fully recover.
At this stage, it’s important to remember back to the era of 2008-2010. At that time, many chose to get out of the stock market. However, they later learned if they had held on in major indexes like the S&P 500, they would have eventually come out ahead. Lesson learned: Don’t panic.
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