Capitulation: The Ugly Stage of Market Behavior

The equity and bond market worldwide has entered into what many believe is the “capitulation” stage. This usually entails widespread selling without regard to economic fundamentals or positive earnings reports. It is typically a time when speculative (not long-term) investors experience enough emotional distress that they will sell their positions at any cost and without any long-term consideration. Commonly, only savvy investors who understand times like this are temporary can profit from a disciplined investment approach. Due to the swift market downturn this year, most stock asset classes have moved squarely into a historically “undervalued” status. I can only imagine that successful investors like Warren Buffett are scouring the market for quality entry points to purchase companies with solid balance sheets. 

During these times, it is very difficult to manage the strong emotions of seeing portfolio losses. It can be discouraging, painful, and frustrating, and even some of the most knowledgeable investors will cave in to their reactive urges and potentially make unwise long-term choices. It is financially worrisome, and our office joins you in this feeling. Let’s be honest – it is just plain stressful when you check your portfolio after a long week of declines. 

However, simple awareness can be cathartic and help bring a better perspective. In his book “The Emotional Investor,” Jay Mooreland shared ten behavioral reasons investors abandon their investment strategy. Read through and see if any of these apply to you personally.  

  1. “We are physiologically hardwired to make hasty decisions without much thought.
  2. Market volatility can cause us to become emotional and lose our sense of where we are and where we want to go.
  3. We like instant feedback (gratification), which influences us to act based on short-term outcomes.
  4. The aversion to uncertainty makes us seek some certainty, even if it is just an illusion—such as with market predictions.
  5. We tend to micromanage our investments because it makes us feel in control.
  6. The media often causes us to focus on short-term events, and makes it difficult to differentiate important news from noise.
  7. We believe we are better at investing than we really are.
  8. Our decisions are often influenced by reference points such as our profit/loss on an investment and past performance.
  9. We detest loss and may make unwise decisions in an attempt to avoid loss.
  10. Our perception can be faulty.”

 If over 20 years of experience has taught me anything, it is this: This too shall pass.  Market declines are temporary disruptions to what is a long-term uptrend. At Legacy, we will continue to manage through the market decline with proper rebalancing and tax loss harvesting. We will set aside additional cash for those taking withdrawals and ensure that every investor is properly allocated to their particular risk profile. We will not be timing markets or making predictions about what might be happening in the short term. No one has been able to do that successfully over time. Discipline and long-term perspective are warranted. One final thought – if you are still in the accumulation phase of your financial plan, this may be an opportunity to be more aggressive with your retirement savings and risk profile. 

Our team remains entirely available and willing to address any concerns or needs you might have at this time. Markets typically reward those who stay the course over time. As we’ve seen throughout history, it is not timing the market, but rather time in the market that makes the difference.


Kevin King

The Legacy Financial Group

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