Feel-good markets are terrible times to buy stocks, and vice versa. Pretty intuitive, right?
Not to many investors. Come sit on the therapist's couch...or read Jason Zweig's recent column on the psychology of investing. He describes how present emotion and future returns are inversely correlated. Say what?
"When did your house feel like the safest investment? Just as its appraised value hit an all-time high, of course. The Dow felt safe when it was at 14000, and it feels risky as hell now that it is clinging to the edge of 8000 with its fingernails. That's perceived risk: low when prices go up, and high when prices go down."
But that perception is actually a lousy indicator of actual risk, he says: "The Dow was vastly more dangerous at 14000 than it is around 8000. Most of the risk of holding stocks has been wrung out of them by their fall in price."
Do you agree?