By Indexopedia Research Team | January 8, 2025 | In
Fear and Greed are Not Your Friends Two powerful emotions–fear and greed–often dominate decision-making, causing investors to act irrationally. While financial markets are driven by data, fundamentals, and trends, human emotions frequently derail logical thinking. To illustrate this point, the graph overlays annual market returns and the net new cash flow into stock mutual funds that occurred during, and surrounding, the market crash in 2009 (i.e., the amount individuals are investing, net of withdrawals). New Cash Flow 2000-2014 As you can see, emotional investors tend to “buy high, sell low”, rather than following the age-old maxim of “buy low, sell high”. Powerful emotions like fear and greed can influence people and cause them to make irrational decisions. Bull markets can also cause some investors to abandon reason and common sense. Fear Fear arises when markets are volatile or when there’s a perception of impending losses. Investors may sell assets in a panic during market downturns, locking-in losses instead of riding out temporary fluctuations. This reaction stems from a desire to avoid further losses, but it can lead to missed opportunities when markets rebound. The investor