Warren Buffett is famous for his long and successful investing track record, as well as his disciplined investment philosophy. Here is one of his most famous sayings, taken from a 1986 letter to Berkshire Hathaway shareholders:

“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree.

Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Contrary to the concept of the “wisdom of crowds,” Mr. Buffett points out an important reality: Investors as a group tend to exhibit emotions that can dramatically impact short- and medium-term prices. Even if you don’t know much about investing, you can probably look at Figure 1 and intuitively sense where the market “mood” is, simply by reading the news and listening to people talk about their finances.

One important lesson—which many of us learn the hard way—is that waiting for an “all-clear signal” is a losing strategy. When the stock market “feels” risky, this usually precedes strong returns; when the market “feels” really safe, it’s often priced for perfection and vulnerable to disappointment.

For example, take the credit crisis of the late 2000s. Despite signs of a peaking housing market, investors continued to buy properties at inflated values with the unreal expectation that housing prices could not fall. It was these same investors left holding the bag when the housing and financial markets collapsed. Anyone who lived through that time remembers the fear and panic associated with watching the daily market fluctuations.

In October 2008, as the market struggled to find its footing Warren Buffett became a willing buyer for many of the stocks people were anxiously selling. This position was not popular, but ultimately profitable because of his perspective. Using history as a guide, he knew despite downturns and setbacks, the long-term trend of the stock market is positive. By deploying excess cash during the crisis—without worrying about the exact timing, or waiting for an all-clear signal on the economy—Mr. Buffett was able to buy assets at very favorable prices and take advantage of the selloff.

While we may not have Warren Buffett’s experience or cash reserves, we can use this example as a lesson for our own lives. When we find ourselves in the midst of an emotional reaction we need to stop, look and listen. What are we feeling versus what are we seeing? What do we know to be true and what are we scared of? Consider the following:

Put excess cash to work
With cash yields at the highest rates in a decade it may seem appealing to keep more cash on hand than necessary. How much is too much? Each financial plan is different, but we recommend a Liquidity strategy funded with cash, high-quality bonds, and borrowing capacity to meet your needs for the next 3-5 years. Given that diversified portfolios have historically staged a full recovery from bear market losses within that period, this approach will help to protect your spending needs from the anxiety of daily market fluctuations.

For any excess cash, consider putting it to work in your long-term investment portfolio. Although we expect volatility to persist in the short-term, lower stock market valuations and higher bond yields represent a good entry point for long-term investors. Holding onto excess cash in the hope of investing at the market bottom can often be more destructive to long-term wealth than panic-selling.

Revisit your allocation
After the market turmoil of 2022, there is a good chance that your asset allocation has drifted away from your long-term target. Given where we are in the market cycle, there are opportunities to buy assets “on sale” and reposition your portfolio for long term success. With this in mind, now is a good time to consider rebalancing your portfolio back to your long-term asset allocation target—especially when you are putting excess cash to work —by adding back to some asset classes that have underperformed recently.

Consider a Roth conversion
If you are in early retirement, and you have a large share of your wealth in tax-deferred retirement accounts—such as a Traditional IRA or 401(k)—you may want to consider a series of partial Roth conversion to lower your tax burden in retirement. Executing a Roth conversion after a drop in market prices can also be beneficial, helping investors to reduce the tax cost of the conversion and shifting future growth on these investments from tax-deferred to tax-free. Please see You should consider a partial Roth conversion this year for more information.

Optimize your balance sheet
A successful financial plan is not solely based on the performance of your assets. For many families managing their tax liability is just as important. The current lifetime gift and estate tax exemption allows each person to give USD 12.92 million estate tax-free at their death or during their lifetime (married couples can give up to USD 25.84 million). This generous exemption is set to sunset at the end of 2025—returning to USD 5 million per person, adjusted for inflation. By using some of your lifetime exemption now, it’s possible to take advantage of depressed valuations—and move future portfolio growth out of your estate—helping you to manage the risk of being subject to the federal estate tax. Estate planning strategies can also help your family to reduce the impact of state-level inheritance and estate taxes, which are imposed in 17 states and can impact families leaving as little as USD 1 million to the next generation.

Fortunately, markets do not truly move in a “cycle,” unlike emotions. Over the long term, diversified investments go higher in value, reflecting a growing economy, technological innovations, and improving profit margins. We have trouble perceiving this exponential progress in our daily lives—distracted as we are by headlines and the “fun-house mirror” of short-term market returns—but the progress continues, nonetheless. Rather than focusing on where your net worth is relative to its all-time high, give yourself credit for the progress that you’ve made in growing your wealth: the dividend and interest income that you’ve collected, the capital gains that you’ve accrued over time, and—most importantly—the experiences and goals that your hard-earned wealth has helped you to achieve.

Main contributors: Justin Waring, Katie Williams, and Ainsley Carbone

Read the original blog Can you trust your instincts? 30 January 2023 and share the one-pager The emotions of the market cycle.

Read the article Building better, healthier habits with behavioral economics for an explanation on behavioral economics from Nobel Laureate Richard Thaler.

This content is a product of the UBS Chief Investment Office.

Timeframes may vary. Strategies are subject to individual client goals, objectives, and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.