Whenever there is an monumental directional change in the financial markets such as the housing party stopping, the first thing society typically does is to look for someone or something to blame. So, it goes: It was the politicians fault for letting it happen, it was the bankers fault for leaving rates so low, it is the clueless borrower/homeowner, it is the hedge fund manager with an unfair advantage, the investment bank and on and it goes. To observe this is to understand the phenomenon. To get wrapped up in who is to blame is to fall victim to it, for any damage has already been done. This is as old as time and will always remain because human nature does not change.
We have to take a step back and remove our emotions to understand why markets do what they do, for understanding will remove much of the fear. Whenever a market moves in such a forceful direction for so long and produces the kind of profits they are capable of, people feel invincible, powerful and in control of their life. We see many of our life’s goals coming into focus because we have more of the resources (money) to attain them. This forms a group type of thinking or a group psychology. What history will show you though, is that just when you think you have everything figured out, things can and often do suddenly change for a very long period of time.
Accepting this and saying goodbye to something like the housing bubble does not come easy. First, we look for a return to the status quo. We will listen to anyone who tells us what we want to hear if it benefits our interest to a return of good times. Then after so long, we begin to realize that many of the predictions we’re listening to are from people operating simply out of hope and self interest versus an objective standpoint and thorough understanding of history.
This sudden and strong shift in direction leaves us feeling lost, frustrated and in some cases hopeless. We see our dreams of financial independence fading into the sunset. Our obligations, once easily taken care of by a booming housing market are now an immense burden. It is from this very mindset that society develops the need to blame mindset or group psychology. The shouts begin: “This is the end of times. It was all planned.” ”Everything will end on 2012″ Fear is easy to sell in this environment and sell it does. Are things bad? Yes. Is this financial crisis probably the worst crisis in financial history? I think so. But, here is something to remember. We created the crisis and we will resolve it one way or another. Crisis does not mean people are going to be running crazy in the streets killing each other. Could this happen? Yes. Will it happen? Probably not.
The reason the fear broker’s popularity rises is that during financial crisis and strife people need something to believe in. Their way of life, once so easy and predictable, has been stripped away and no longer exists. So, there must be some evil and sinister plot. When we remove ourselves and observe everything from a distance, we see that this group psychology is simply the result of all of our decisions over a period of time. This is what caused the boom and the bust and not some sinister plot dreamed up in some secretive meeting.
The markets are never ultimately determined by politics or what some media outlet says on a given day. As I wrote in my last post, the financial markets are in the process digesting the last few years and sorting things out as to how it will react and for how long. The result is not something we can prevent nor should we try to. Of course, this will not stop politicians in trying to force their will on what is already set to happen. The key is to learn to adapt. Before we start to look into ways to steel yourself from crisis and do things (non-market related-things that are not contingent on market returns) we need to be willing to change.
2 Choices In Financial Crisis: Adapt And Thrive Or Get Left Behind.
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