This post was originally made on May 23, 2006 on a former blog of mine.

The markets, as most other areas of life, are a battlefield between reason and insanity. Market participants struggle with the constant tug-of-war between logic and emotion. Those who are left-brain dominant will tend to lean towards logic and reason for their decision making. Those who are more right-brain inclined will defer to their emotions as the basis for their decision. Even if you fancy yourself a logic oriented person, you will inevitably be contacted by the demons of emotion - fear and greed.

Anyone who has been an investor for long knows inherently that the markets don’t always reflect a rational playing field. More often than not the price swings are dictated by the battle between fear and greed and not by a battle of dueling logics. Even the techno quant geeks who toil away for hours on end building trading algorithms in their molding cubicles will be swayed by emotion on occasion.

Most financial planners will tell you that even the best investment plan will not be good enough for their clients during a bull market and not be safe enough for their clients during the bear. Emotion is a powerful thing. Ask anyone who has ever studied crowd psychology or the herd mentality and they will tell you just how strong a wave of emotion can be. Emotions can cause masses of people to do things they would not ordinarily have done if they had made a rational individual decision. The stock market is a vast breeding ground for emotional upheaval and it is communicated to us everyday via thousands of different media channels. There is always a constant anxiety to be running in the direction of the stampeding herd.

As if the pressures of markets were not enough, each of us has a sort of predisposition to fear and greed based on our magnitude of wealth. I noticed this particular phenomenon when speaking with people who may become potential clients of mine. Now, what I am about to discuss is a broad generalization. There will certainly be people in both camps who belong in the other, however, it is useful to note that there are emotional differences among people of varying degrees of wealth. This is not a damnation of these mindsets. It is simply to raise awareness of them as a means to make better investment decisions.

This observation is something I call the Fear-Greed Continuum. When I first started talking to people about becoming an investment advisor/financial planner many of them were eager to hear about it. Many of them also wanted to inquire about the use of my services. The funny thing I noticed is that there were generally two types of people:

1. Make Me Rich - these were individuals, usually younger with some money saved, who viewed investing as a sort of get-rich quick scheme.


2. Don’t Lose My Money - these were generally older people with LOTS of money in the bank who were more fearful of losing what they had (or losing purchasing power) than they were concerned about increasing it.

There are some very low net worth people who are fearful but they are generally not investors so I am leaving them out. What we are left with is a stable of individuals who are successful and hardworking but have some sort of idea that investing is a way to get out of the rat race quickly. They tell their investment advisors to “make me rich”. They are in essence…greedy. If by chance they did become rich then they would move more towards group number two. These are the people who have typically worked very hard at amassing a great deal of wealth. They, therefore, have more respect for how hard it is to become wealthy. With that in mind, they are more concerned about the preservation of that wealth than they are with taking more risk to continue building it. These people are fearful of losing what they have obtained and will say “don’t lose my money”.

Whether you are a do-it-yourself investor or seek investment advice from a professional, you should know which part of the continuum you reside in. It will help you balance your investment goals with reality. If you are a get-rich-quick type then it may be prudent to evaluate the risk in your portfolio and set some more realistic goals. If you are of the don’t-lose-my-money mentality then you may be being too conservative with your portfolio. Either way, a healthy dose of objective evaluation could be useful.

One final thought about fighting these emotional wars. Just as in life, it helps to have a voice of reason present when making an investment decision. Many people are leery of financial planners because they think they cannot “beat the market” or do not provide enough value. Realize that much of the value they can provide for you is being a buffer between your emotions and your rational decision making faculty. It is never easy to sit back and watch your wealth decrease with a market slide. If you have someone whose livelihood depends on it working with you then they may be able to help quell your fears and stop you from selling out at the bottom.

“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.” -Benjamin Graham

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