Markets, emotions, and you

Understanding market cycles and your emotions can help you be a better investor.

Life has its cycles, as do the economy and the financial markets. But when it comes to market cycles, emotions often get in our way. Strong feelings can cloud our judgement and steer us toward financial decisions that may not support our long-term goals. Understanding the market cycles and paying close attention to our emotions can help us stay on track.

3 steps to become a mindful investor

1. Be aware that emotions play an instrumental role in decision-making, including ways that are outside of conscious thought. People often rely on emotions to make decisions because it saves time and mental energy compared to a deliberate, calculating approach. An emotional approach makes sense for everyday, low-stakes decisions, like “What should I each for lunch?” but may not make sense when investing for long-term goals.

2. Understand that “going with your gut” can lead to better or worse choices, depending on the situation and person. Investors who panic and sell out of stocks may realize losses and miss the potential gains on the other side of the turbulence. On the other hand, emotions can also serve as a helpful warning sign, such as the nervous feeling you get when thinking about investing in a risky, unfamiliar stock.

3. Practice mindfulness when the market gets rocky and you feel emotional impulses kicking in. This practice consists of pausing to reflect on the here-and-now, and takes many forms: Meditating, counting your blessings, refocusing on the long term, or merely stopping to question why you are feeling a certain way all constitute mindful acts.

Taking a moment to ask yourself what is really driving a decision can act as a circuit-breaker and lead to better outcomes. Practicing mindfulness can help you develop discipline when it comes to financial decision-making but also help manage your emotions in the face of market ups and downs.

The economic and market cycles and our emotions

Economic cycles range from 28 months to more than 10 years. Stock market cycles have typically anticipated economic cycles by 6–12 months on average. The cycles are familiar—the economy expands and contracts and the markets rise and fall. Our emotions often get swept up in the recurring ebb and flow.

When markets shift, it's valuable to have a long-term asset allocation plan that can be rebalanced to a target mix of stocks, bonds, and cash. Such a plan can force you to remain disciplined through cycles—so you can buy low and sell high.

The top

All market cycles reach an exhilarating top. At this point, growth is strong but moderating, unemployment is low, and interest rates are often falling. However, corporate earnings are under pressure, and the risk of a recession is rising. Growth has caused many investors to feel invincible, and many buy more stocks. They buy high on a high—just as the market has crested.

What you may feel: Lots of people are making money and we want to as well. It may seem like every investment is a winner and FOMO (fear of missing out) is pervasive. Look out for overconfidence at this time. “Feeling happy can give us false expectations that good times will continue,” says David DeSteno, a professor of psychology at Northeastern University, where he directs the Social Emotions Group.

What to consider: Instead of buying, most investors should think about selling some stocks to capture gains, especially if their allocation to stocks has risen above their long-term plan. Buying high-quality bonds might also help prepare for a cyclical drop.

Turning down

After the peak comes the scary slide downward. The economy lurches toward recession and corporate profits are sliding. At first, investors hold out hope for the bull market to continue. But as prices fall, fear arises—along with the temptation to sell.

What you may feel: Be on the lookout for fear and despair as the economy shrinks and investors sell their gains. “As fear sets in, we can begin to assume that the market will never fully rebound,” DeSteno says. You may feel the urge to sell your investments to avoid the pain of seeing your balances fall.

What to consider: Now the game is protection and patience. Going to cash can limit your ability to grow your money long term. If your asset mix matches your goals, it could make sense to continue investing.

Says DeSteno: “To combat the effects of fear, take time to focus on things in your life that make you feel grateful. Science shows that gratitude increases patience.”

Hitting bottom

For investors, a market bottom is tumultuous and depressing. Stocks can drop more during this phase. A faint light is at the end of the tunnel as the Fed cuts rates. Even with a solid plan, you may feel defeated. This can be a point of maximum pain, but also a point of maximum potential.

What you may feel: The pain you felt on the way down may be amplified by regrets for not selling out when the markets started to teeter. Everyone knows of someone who sold “before the crash” and now there’s another kind of FOMO going around.

What to consider: Perseverance is key. “Don’t forget: You did well before the downturn, and take pride in that. Now’s the chance to invest in even better ways,” DeSteno says. The measured path is to invest and if necessary, rebalance to your target mix of investments—not cash out and lock in losses. Stocks are on sale. Investors who buy in this valley have done well when prices begin rising. Historically, powerful rebounds have followed some of the deepest market drops.


After the bottom comes the cautious enthusiasm of an emerging bull market. The economy shows signs of a rebound, interest rates are low, and corporate profits are rising. So are stocks: The average increase in the S&P 500 the year after the bottom of a market cycle is 47%. But many investors have checked out, and as the market rises, they miss the early, often powerful, rebound.

What you may feel: It’s hard to forget the pain of the stock market falling. Your confidence may be shaken and you may be wondering if you’re cut out for investing at all. But if you stuck with it, you may be nurturing some hopes that your investments will recover.

What to consider: Think like a contrarian. The stock market is rebounding. If you remained invested, you see some recovery. If your stock allocation has gone below plan, it’s time to bring your portfolio back to your long-term target.

Rising again

The bull market is in play, and investors grow confident, even greedy as they sense exhilaration again. The economy is expanding. Stock prices are going up. Many forget their target mix of stocks, bonds, and cash and their portfolio drifts too heavily into stocks.

What you may feel: It seems like everyone is making money again and every investment seems like a winner. Overconfidence can start to creep up during this time and that can make investors less careful.

What to consider: Asset allocation cannot guarantee a profit or avoid a loss, but your target asset mix can hold greed at bay and prepare you for the next downturn. Rebalancing your portfolio now could include selling stocks and buying bonds.

Managing your emotions with a plan

Your emotions, and your reactions to them, give you information. Consider how you felt when the market dropped in February and March of 2020. If you felt scared or angry enough to sell out of your investments, it may be a good opportunity to take a step back and evaluate your financial plan.

Ask any successful investor their secret and the most common response is to make an investment plan—and stick to it. A strong plan includes a mix of stocks, bonds, and cash that aligns with your goals, time horizon, and your ability to manage risk.

Next steps to consider

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