Investing in All Markets

Investing in All Markets - Cycles and Attitudes


Investing in markets can be hard work or a piece of cake.

The reason is that all markets move in a cycle: they go from high to low to high again. Though this cycle has repeated itself all throughout history, wherever markets have existed, most investors fail to act correctly when faced with a variety of market stages.  

The attitudes often present in each market stage are as follows:

Stage 1. Pessimism

  • This is the market’s lowest point. After suffering major losses, sellers are in the process of getting out of the market. They act out of fear, panic and desperation.  At this point in the cycle, most investors behave irrationally and rather than buying as they should (remember the old saying: buy low and sell high) they are either paralyzed, or in the process of selling. This is the opposite of what they should be doing.

Stage 2. Skepticism

  • At this point in the cycle, the market is already in the stages of early recovery and is no longer at the bottom.  Usually, the professional investors have recognized the value in the market (e.g., of company shares) and have started to accumulate. However, the average investor, having been “victimized”, has usually left the market by this stage.
  • The average investor is actually skeptical of the continuing recovery as they recall the painful experience of the recent past.
  • As well, media coverage is often still negative, questioning the market rise and highlighting any bad news. This only adds to the investors’ unease. It is important to note that most news networks are a poor source of information as they simply report the current market sentiments, rather than the actual conditions.

Stage 3. Optimism

  • At this stage, the market has improved notably. The news networks are usually quite bullish now: good news is now being highlighted, and the average investor is starting to feel better as the economy improves. 
  • Also, investors are now starting to return to the market in growing numbers, and they are feeling optimistic rather than skeptical.  In essence, as the market moves forward, more and more skeptics become optimistic.

Stage 4. Euphoria

  • The market has exceeded previous highs to a much greater extent than previously expected.  The average investor is now fully committed, and more and more investors are entering the market. Professional and institutional investors are now more sanguine but they are largely ignored by the media.
  • As usual, the media reports the current sentiment, spreading the sense of well-being and optimism that the public often wants to hear.
  • The most unlikely investors finally concede and begin investing.

Finally, the last possible investor who would have invested finally gives in and buys, cementing the high in the market.  At this critical point, anyone who sells will have no or limited buyers. The market is now in crash mode, and the cycle returns to Stage 1 as the market sell-off continues. This is but the first of many cycles.

What a roller coaster.  No wonder investors in turn despise the market and at other times love it. It can drive anyone insane!

So what is the key?


Like in all things in life, strive for balance. A balanced lifestyle, a balanced diet, and a balanced portfolio.

By having a balanced portfolio, in which you incorporate not only stocks (domestic and international), but bonds (domestic and international), and cash, these market cycles can be managed comfortably. There’s no need to lose sleep, throw in the towel or buy at the wrong time.

How can this be determined? Correlation. Since assets behave differently at each stage, a balanced portfolio will incorporate most, if not all, asset types.

Example: In 2009, while Canadian Large Cap Stocks fell 31.2%, US Large Cap Stocks fell 21.9% and Foreign Equities fell 28%, Global Bonds were up 31.07%, US bonds were up 31.64% and Canadian Bonds were up 6.42%.

In 2009, a conservatively constructed, balanced portfolio declined less than 10% and recovered within 8 months. Since then, it appreciated about 8% per year, or 46% in total.   It was a piece of cake!

A final recommendation is to not go at it alone.  Work with a trusted investment profession to help you build a balance portfolio, as well as to help you plan and achieve your investment and lifestyle goals.