Fear or Greed: what is driving your investment decisions?

The start of the year has been anything but boring. We started the year at record highs, experienced  steep declines in January and February has been up and down depending on the day of the week. In a market like this, the questions becomes whether fear or greed should be controlling your decisions.

Let’s be clear, 2020 and 2021 were anomalies. The share market is always hard, and sometimes it’s just setting you up in a long term confidence scam. The market doesn’t respect you or care for your feelings.

There is a lot of noise in the market right now:

  • Storm clouds are gathering over Eastern Europe as Russia threatens to invade Ukraine.
  • Interest rates only have one way they can go – up. Global markets have had a massive tailwind from artificially low interest rates since the GFC way back in 2008. This was further boosted by ‘quantitative easing’, which was effectively just printing money and buying financial assets. Now we are suddenly talking about ‘quantitative tightening’.
  • The two major global economies – USA and China – are facing rising inflation and slowing growth; which would certainly drag on every other country’s growth prospects.

So how bad can this get?

The below chart is the long-term weekly average of the ASX All Ordinaries. The blue line shows the growth trajectory of equities over the past 25 years. It is also represents the level to where the market has always fallen back to, and even below.

So unless we are entering a ‘new paradigm’, and the long term chart starts a leg-up of growth that we haven’t seen since the ASX went digital, then it’s probably fair to say that we are overvalued.

Equally, each time we come back to that line after running a fair bit higher than that point, the sell-off has gone much lower – more often than not, around another 15% to 20% below that line.

What it doesn’t say, is WHEN we might come back to that line, nor does it guarantee that it will at all.

But it is not all bad news

Firstly, none of the current drama is unknown. We all knew about ultra-low interest rates, rising inflation and COVID-19. So none of this looks like a ‘GFC’ or ‘Coronavirus-outbreak’ style ‘out of the blue’ type event.

Secondly, there is still a lot of money to be invested. Superannuation funds in Australia are only getting bigger; dividends, which usually get re-invested into the market, have been strong, as have been commodity prices and property.

Thirdly, there is a global retail investing phenomenon. Seemingly everyone wants to get into shares… and crypto… and property…

What it all means for investors

Of the 1.4m people now estimated to be buying shares online, half of them have never ever seen a sell-off. They joined after the COVID-induced sell-off in early 2020, and it has largely been all upside.

They have never endured the gut-wrenching 10% sell-off like in January, let alone a 30% or 40% global market meltdown.

They’ve only known greed, not fear.

Whether January was a test, just a normal market correction, or a warning sign of worse to come, one thing is for certain, when the next major correction does come, the market won’t be as cool as it was when everything was going up and it was easy to pick winners.

In volatile markets having the right tools and information becomes even more critical. Professional investors have a long had an advantage over the rest of us in this department. And that gap has only widened with many these novice and new investors relying on ‘low cost’ or so-called ‘cheap’ online brokers that in many ways are not fit for purpose in the current market.

Marketech is looking to level this playing field, with a professional grade platform that includes features like live pricing, live charts and live market depth, giving investors the technology and tools to actively and confidently invest across all market cycles – whether fearful or greedy.