In the complex world of financial markets, one fundamental truth prevails: everything moves in cycles.
These cycles are often the result of emotional decisions that cause markets to swing like a pendulum. At times, these market cycles can reach the extreme ends of human emotions: Fear and Greed.
However, it’s crucial to understand that these emotional extremes are not permanent, and over time, markets tend to self-correct, returning closer to the middle ground.
Fear eventually subsides, leading to a more rational assessment of market conditions, while greed moderates as asset prices adjust to more reasonable levels. This process of self-correction helps bring markets back to a state of equilibrium or neutrality.
Savvy investors recognize that the extreme swings to fear present opportunities to buy assets at a discount.
Warren Buffett, one of the most successful investors of all time, famously advised, “Be fearful when others are greedy and greedy when others are fearful.”
The key for the average long-term investor is to refrain from seeking short-term profits through active trading driven by “Fear” or “Greed.” Straying from your long-term investment strategy in reaction to market fluctuations typically harms your long-term prospects. While the temptation to act during extreme market conditions is only human, it is often unproductive and costly.
Staying the course, adhering to a well-thought-out financial plan, is the wisest approach for the long-term investor. A long-term investment strategy often includes diversified portfolios that are designed to withstand market volatility over time.
Real wealth-building power comes from staying invested over the long term and benefiting from compounding returns.
Don’t let the turbulence of the market lead you astray.
“When you zoom in you obsess. When you zoom out you observe.” – Rick Rubin
When markets are turbulant it is better to take a step back and “zoom out” in order to regain your long-term perspective.
The above article was written and adapted by Marius Kilian.