We feel compelled from time to time to write about behavioral finance – in particular, which actions investors take (frequently bad) when they observe irrational, illogical dips and jumps in the markets which appear to be opposite of what is expected.
A case in point: On Thursday, the FED kept interest rates unchanged. Low interest rates is a good thing for the real estate market, car sales, low mortgage rates, lower gasoline prices, many other things to help the consumer, and higher business profits. What does the stock market do in reaction to this good news on Thursday and Friday? It dropped!
Today (Monday), oil prices rose in response to unconfirmed rumors of OPEC cutting production. And, interest rates on longer term bonds moved higher. Both were bad news for the stock market; but, what did the market do? It jumped over 125 points.
These irrational, illogical moves in the stock market can cause human emotions to take over and heavily influence investors in their decision making process IN A NEGATIVE WAY IN THE SHORT TERM.
But in the long term, the stock market IS rational. So, we will write several articles in the future to explain some examples of behavioral finance in real life to help you avoid letting your emotions cloud your investment judgment. BUT, FOR THE TIME BEING, WE RECOMMEND YOU KEEP AN EYE ON THE “HEAT MAP” (BELOW) WHICH SERVES AS AN EXCELLENT TOOL TO KEEP THINGS IN PERSPECTIVE OVER A LONGER PERIOD.