I apologize in advance that the complexity of this entry is a bit backwards. It will start with the most complex information first and then simplify into more attainable concepts. There are countless measures to the market, but one commonly quoted is CNNFN's own "Fear and Greed Index." According to Investopedia, it measures those two primary emotions that drive investors as generated by seven indicators:
1. Stock Price Momentum - as measured by the S&P 500 versus its 125-day moving average.
2. Stock Price Strength - based on the number of stocks hitting 52-week highs versus those hitting 52-week lows on the NYSE.
3. Stock Price Breadth - as measured by trading volumes in rising stocks against declining stocks.
4. Put and Call Options - based on the Put/Call ratio.
5. Junk Bond Demand - as measured by the spread between yields on investment grade bonds and junk bonds.
6. Market Volatility - as measured by the CBOE Volatility Index or VIX.
7. Safe Haven Demand - based on the difference in returns for stocks versus Treasuries.
Each of these seven indicators is measured on a single scale from 0 to 100 with 50 denoting a neutral reading, and a higher reading signaling more greed. The index is then computed by taking an equal-weighted average of the seven indicators.
Furthermore, "Investopedia explains the Fear and Greed Index is a contrarian index of sorts, which is based on the premise that excessive fear can result in stocks trading well below their intrinsic values while unbridled greed can result in stocks being bid up far above what they should be worth.
"The index can therefore be used to signal potential turning points in the equity markets. For example, the index sank to a low of 12 on Sept. 17, 2008, when the S&P 500 fell to a three-year low in the aftermath of the Lehman Brothers bankruptcy and the near-demise of insurance giant AIG. It traded over 90 in September 2012 as global equities rallied following the Federal Reserve's third round of quantitative easing (QE3)."
Accordingly, the nature of investing itself is based on fear and greed, both of which are commonly identified as sinful emotions. Is there any way to achieve guilt-free investing? Fortunately, the answer is yes.
John Bogle, best known for as the creator of index funds, has rallied against the sinful actions leading up to the incidents like the collapse of the Lehman Brothers, and Enron before it, as an irrational exuberance of greed in a way. His 2009 book Enough opened with a tale of accomplished authors Kurt Vonnegut and Joseph Heller attending a party by a billionaire hedge fund manager in Shelter Island. Vonnegut noted how that gentleman "(has) made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have ... enough'."
The temptation to reach for more is equally balanced by the fear of losing too much, which is why the Fear and Greed Index is relevant to daily market watchers. However, those emotions are controllable. Ignoring them and deciding that they will have no power are both successful methods for keeping them in check (the success of either of them most likely varies by each person). The fact is that no one started investing to lose money, and long-term investors are far more likely than not to gain, which is a success. Comparing it to other fields of greener grass is the first mistake. Concepts like "opportunity costs" truly exist and worthwhile factors for decision making, but they should stay in proportion to higher drivers that are more important.
The success of the index fund is a win against fear and greed. One of the most telling descriptions Bogle has given about index funds is that it enables every American to participate in the economy, effectively giving the average Americans access to "their fair share" of the American economy. When the market rises, the index fund increases. If the market retreats, the index fund will lose value. If investors create a simple portfolio by selecting index funds, then there should be no opportunity for greed (and likewise, if their intentions are pure, then there should be little concern for fear), and the profits realized are not a matter of wanting more, but simply partaking in the American economy. Setting aside any displaced intentions, pure index fund investors can enjoy guilt-free investing.
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