When to invest in the stock market? When is the scariest time to decide to do it!

«Price charts in the stock market are nothing but stories of people making emotional mistakes», — states Adam Grace, chief investment officer of Waverly Advisors and author of the book «Technical analysis: art or science?»We are always at that point where indecisive investors can look back in the not-too-distant past and say: «Here’s the decision that I’ve taken too long to make, which is markedly impairing my chances of financial well-being in the future».

BankRate.com conducted a survey of Americans with brokerage accounts and found that 76% of respondents are not inclined to invest in the stock market right now, when interest rates on savings accounts and certificates of deposit are at record lows and the stock market looks overbought. Without delving into the heart of the problem, one could argue that investors are simply being cautious, intuitively sensing a correction coming, and want to wait for a better time for active “portfolio building.” The only conclusion that can be made in the current situation is that investors simply lack the courage to take active actions.

“Memories of the 2008 crisis are still fresh; people lost a lot then, buying at the highs in anticipation of the crash. They vowed not to come into the stock market afterward and still hold to their internal promise,” says Greg McBride, senior financial analyst at BankRate.com.

And the main problem here is the heightened emotionality of investors, which in turn leads to a wrong definition of risk. People are afraid to enter the stock market with their funds, believing that it is still too risky, while preferring deposits and bonds because of the illusion of 100% safety. Is this really the case? In fact, the opposite is true.

Emotional traps

If we consider two risks separately – a one-time “loss” (decrease in the current market price) of funds in the stock market during the correction period and a decrease in the final yield due to too low rates in “risk-free” assets, it becomes obvious: weakness now and the pursuit of excessive “safety” simply will not give you a chance for good returns.

After the majority of investors become convinced that it is impossible to get the desired income (in the long term) without taking additional risks taking into account normal portfolio diversification, the public begins to “come out of the shadows”, feeding on the hope that the higher the market climbs, the more stable the growth and safer the entry.

This is also the wrong course. Because waiting too long leads to buying at the time of the highest probability of correction. And after the correction starts, the account is reduced, people feel that they have been wronged again, and sell everything without much thought, just to avoid further trouble. In fact, such emotional outbursts are the main factor exploited by experienced investors. Experts say that the overly cautious behavior of the average investor is actually a bullish signal when the market is gradually climbing the “wall of worry and indecision”. The problem is that often the most emotional investors worry “in the wrong direction,” which ultimately leads to suboptimal action and lower long-term investment returns.

«When you’re in the market and still feel quite comfortable and under no pressure, the market eventually teaches you a lesson and makes you regret being relaxed» — says Richard Peterson, an expert at MarketPsych Data. — You have to take risks when you least want to. You become a real professional only after you can make decisions that go against your emotions».

There is nothing wrong with making prudent decisions, being a conservative investor, and practicing broad diversification. You don’t have to rush headlong into the market every time you think opportunities are slipping away as you grow. But any attempt to protect your assets from localized shocks must be analyzed through the lens of opportunity costs, which will inevitably grow to catastrophic proportions if we fear a Great Depression every day.

In the end, there are only two alternatives: either we are satisfied with the income from bank deposits and by the time we finish our working life we have a small amount to pay utility bills and buy once a week a noticeably more expensive basket of groceries; or we live in our own pleasure and remember the moments when the power of reason overcame our emotional weaknesses.