Feelings, nothing more than feelings

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Feelings, nothing more than feelings.

Are you feeling good after October's market rally? You should be, because it was a decent bounce and it was pretty much across the board. Mind you, investors badly needed it after the bruising August and September endured by all. Those two months were so bad for global share markets that the September quarter earned the title of "worst quarter since the global financial crisis".

Global markets climbed to near record highs in October as central banks again worked to allay concerns about the health of the global economy. While the U.S. Federal Reserve had been heading towards a rate hike, it held off in September which helped markets regain their poise after a horrible August. Mario Draghi, the head of the European Central Bank, also helped to bolster sentiment by hinting at more quantitative easing to come, and the People's Bank of China cut interest rates for a sixth time in just 12 months which helped brace the critical Chinese economy.

In stark contrast to earlier months, it was hard to ignore the joie de vivre that took hold of markets in October. European markets enjoyed their strongest gain since July 2009, lifting around 8% in October, and Japan's Nikkei rose nearly 10% which was its best showing for a couple of years. October was the best month for US shares in four years, and the buoyancy was even felt down under with both Australasian markets bouncing from their lows (albeit slightly behind other markets).

Other positive drivers in October included a US profit reporting season with few negative surprises. Excluding the energy sector, 341 companies in the S&P500 Index reported an average profit growth of 6.1% and revenue growth of 1.5% — not stellar, but not scary either. October was also a big month for deal-making with $US544 billion worth of mergers and acquisitions announced during the month, excluding the potential merger of Pfizer and Allergan which in itself could be worth $US125 billion.

So, a good month and probably an overdue bounce given that sentiment and confidence had plummeted to rock bottom levels.

It may well be though, that a lot of the euphoria has gone straight over the heads of many investors, who are still smarting over the volatility of recent months. This is not unusual; as humans we are conditioned to react in precisely the wrong ways following extreme experiences. The September quarter was certainly extreme in terms of testing the mettle of most investors.

One commentator recently wrote of some investors' tendency towards "breakevenitis". This phenomenon occurs following a period of fear or pain (such as falling markets) where the pain becomes etched in our minds, leading us to expect more to come. When the fear or pain ends (e.g. when the market rebounds) we breathe a sigh of relief, sell as soon as prices get back to where they were before the pain, and thank our lucky stars that we "didn't lose anything".

But of course, in investing, it is dangerous to make such forward-looking decisions based on backward looking experiences or information. It is almost guaranteed to lead to missed opportunities, and in investing, missed opportunities often lead to money lost.

Regardless of how we feel about October's bounce, there is bound to be another period of volatility like we experienced in the September quarter. While all investors like to believe that we react rationally in our investment decisions, feelings do play a big role.

It is important to understand the effect that our own emotions (particularly fear and greed) can have on our investment choices. If we are relieved to have had the opportunity to sell in October, we might have allowed ourselves to become too fearful. If we regret not buying in early September, should we kick ourselves for not buying when prices were at their lowest before they rebounded?. If after October's rebound we are feeling "pleased-but-not-ecstatic", in the realisation that more negative times might lie ahead, we've probably got it about right.


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