Investor psychology plays a large part in the pricing of assets - not just stocks and bonds - but assets in general. Stocks are priced much like art work. Mid-2019, a Claude Monet painting sold for a record amount of $110 million. Why? The cost of the paint and canvas is like, maybe $40. So perceived value and confidence makes up most of the price.
Stock prices move based on two things: anticipation and surprise. The stock price is not the company. A company may not go out of business, but you could lose 90% of your value for example. We are in a margin call market. Selling begets more selling in this environment. The image below is not perfect, but will give you a general road map of how the investment cycle plays out. My interpretation is that we are in the denial phase. I suspect that many who look at this will not believe me. The next rally should be a bull trap. If that does not hold, then we could begin the fear & capitulation phase.
Planning for the worst and hoping for the best is a more prudent approach than simply hoping for the best. As investors we carry around so much baggage. The rapid drop in the stock market has happened. The question to you is; what are you going to do today to deal with this new reality?
