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Remember, the market is in a perpetual cycle. And within these cycles, there is an imaginary pendulum that swings between fear and greed. The same investors who sold at the lows in December will be the ones to buy at the new highs at higher sentiment.

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  • The Modern Fear & Greed Index [9 Sentiment Indicators]?

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Fear and Greed

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Fear and Greed

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  • The Modern Fear & Greed Index [9 Sentiment Indicators]?

Robert E. Kristen Barrett Senior Managing Editor. Paul Mampilly Editor of Profits Unlimited and four elite trading services. Amber Lancaster Director of Investment Research. Jessica Cohn Editorial Director. Thanks again I sure like your humble approach about this whole thing. Prices dropped, fear rose … which, in turn, brought out more sellers, leading to more fear. This begs the question: How do astute investors determine when other investors are most fearful?

I check it daily.

The Modern Fear & Greed Index [9 Sentiment Indicators]

Stock Price Strength — the ratio of stocks hitting week highs vs. Put and Call Options — the ratio of investors making bearish or bullish bets. Buffett was once heavily criticized for refusing to invest in high-flying tech stocks. But once the tech bubble burst, his critics were silenced.

Buffett stuck with his comfort zone: his long-term plan. By avoiding the dominant market emotion of the time—greed—he was able to avoid the losses felt by those hit by the bust. Just as the market can become overwhelmed with greed, the same can happen with fear "an unpleasant, often strong emotion, of anticipation or awareness of danger".

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When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy. Just as greed dominated the market during the dot-com boom, the same can be said of the prevalence of fear following its bust. In a bid to stem their losses, investors quickly moved out of the equity stock markets in search of less risky buys. Money poured into money market securities, stable value funds and principal-protected funds—all low-risk and low-return securities.

This mass exodus out of the stock market shows a complete disregard for a long-term investing plan based on fundamentals. Investors threw their plans out the window because they were scared, overrun by a fear of sustaining further losses. Granted, losing a large portion of your equity portfolio's worth is a tough pill to swallow, but even harder to digest is the thought that the new instruments that initially received the inflows have very little chance of ever rebuilding that wealth.

Just as scrapping your investment plan to hop on the latest get-rich-quick investment can tear a large hole in your portfolio, so too can getting swept up in the prevailing fear of the overall market by switching to low-risk, low-return investments. All of this talk of fear and greed relates to the volatility inherent in the stock market.

When investors lose their comfort level due to losses or market instability, they become vulnerable to these emotions, often resulting in very costly mistakes. Avoid getting swept up in the dominant market sentiment of the day, which can be driven by a mentality of fear or greed, and stick to the basic fundamentals of investing. It is also important to choose a suitable asset allocation mix.

For example, if you are an extremely risk averse person, you are likely to be more susceptible to being overrun by the fear dominating the market, and therefore your exposure to equity securities should not be as great as those who can tolerate more risk.

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There's a fine line between controlling your emotions and being just plain stubborn. Remember also to re-evaluate your investment strategy and allow yourself to be flexible—to a point—and remain rational when making decisions to change your plan of action. You are the final decision-maker for your portfolio, and thus responsible for any gains or losses in your investments. Sticking to sound investment decisions while controlling your emotions, whether greed or fear, and not blindly following market sentiment is crucial to successful investing and maintaining your long-term strategy.

But beware: Never wavering from an investment strategy during times of high emotions in the market can also spell disaster. It's a balancing act that requires you to keep your wits about you. Investing Essentials. Trading Psychology. Trading Basic Education. Investopedia uses cookies to provide you with a great user experience. By using Investopedia, you accept our.