The Irrational Investor

It is correct to approach market timing with a positive attitude, as well as positive expectations. To feel confident that your strategy will not only be quite profitable, but will also protect you from the inevitable declines that always occur in the markets.

However, I am concerned that some market timers take an unrealistic approach.

Elevated Expectations

The unrealistic approach to market timing is the expectation of instant gratification. The expectation of immediate gains, and that losses are not only "not" something to be expected, but also "not" to be tolerated.

Part of this is caused by unrealistic advertising promises by timing services (as well as many other trading services) in advertisements found all over the internet. But part is also caused by investors wanting to believe that easy money is there for the taking.

There is "no" easy money. Market timing works, but it takes time, commitment, patience, and the ability to stick to a strategy even when friends, TV commentators and news events are pressuring you to do the opposite.

Minimizing Unpleasant Consequences

Many new market timers approach the markets with a tendency to minimize the very real potential for unpleasant consequences and to be overly optimistic.

Do you remember Yale economist Robert Schiller's book "Irrational Exuberance?" Published in the year 2000, it was widely criticized. At least it was until the bear market chopped 50% to 80% off the S&P and Nasdaq (and off many portfolios).

Apparently, lessons learned from history quickly disappear from the minds of Mr. Schiller's aptly described "irrational" investors. Many have already forgotten the harsh lessons of the bear market of 2000-2002. And if they do remember, they downplay what they learned.

"Irrational investors tend to underestimate the market. They are usually bullish and fail to recognize that the stock market can, and will, take away profits."

Long-term planning is unimportant to the irrational investor. Yet interestingly enough, market timing actually defines long term planning. Setting in motion a plan to grow your investments over time, and to protect them from losses, is the opposite of speculative trading.

We hope no FibTimer subscribers fall into the trap of having elevated and irrational expectations. Almost every week we write commentaries designed to help our subscribers know what to expect, so that they are prepared for whatever the market throws at us.

Market timers with elevated expectations will abandon a strategy after an inevitable small loss or two. As a result, they wind up locking in those losses without giving the timing strategies, which work quite well over time, a chance to perform.

Having expectations that are unlikely to be met is a sure fire way to making poor emotional decisions, always at the wrong times, and usually creating losses that should never have occurred. Below is a list of several common irrational and overconfident traits.

Irrational Traits

• Irrational investors tend to underestimate the market. They are usually bullish and fail to recognize that the stock market can, and will, take away profits.
  
  
• Irrational investors do not want to hear bad news during a rally, and do not want to hear good news near the bottom of a correction. The word "greed" comes into play here. Take my word for it, there are more than enough savvy traders out there who can and will easily relieve greedy investors of their profits. They are experts in the psychology of traders, and know that most market participants will hold onto positions too long.
  
  
• Irrational investors hate admitting mistakes. It is nothing more than allowing your ego to guide your trading decisions. Irrational investors hate to admit they've made a bad decision. This can result in market timing buy and sell signals being ignored, or second guessed.
  
  
• Irrational investors often have a herd mentality. Though they may think they are acting independently, they are not. While market timers often go "against" the crowd, irrational investors are drawn into making decisions based on TV and radio commentaries, news events, as well as friends and relatives who can and often do exert a great deal of emotional pressure.