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While having dinner with new friends the other night I had a flashback of a high school class we had each week called “PIWA,” which stands for Politics, Investments and World Affairs. I’m sure that the teacher from all those years ago would be pleased to know that he I had indeed been paying attention those years ago.

Although we’d just met the couple we were dining with, we were not lacking for topics of conversation due to recent political, investment and world affair issues. I’ve learned (often the hard way) that it’s best to listen more than one speaks while getting to know new friends and their views on these matters.

Our new friend Jerry let us know that he’s quite logical (retired CPA) while his wife Mary (retired attorney) is extremely emotional. After giving us these clues on their personality traits we entered into a lively discussion on world financial markets.

We focused on determining just how much of the current market volatility can be attributed to human emotions. Quantifying emotions is tough, but there’s a way to measure the actual volatility that has been running rampant.

There’s an index called the VIX (and no, that’s not a Roman numeral). The CBOE Volatility Index (VIX) measures market expectations of near-term volatility as conveyed by S&P 500 stock index option prices. It came about in 1993, and has been considered to be a barometer of sentiment and forward looking volatility.

Without getting into too much detail, VIX values greater than 30 are generally associated with a large amount of volatility while VIX values below 20 generally correspond to less stressful times in the markets. Last year the VIX averaged around 17 for all of last year to give you some perspective and at the time of this writing is at 66.96 down from a high of 89.53.

Back to Mr. Logical and Mrs. Emotional; is all this volatility rational or could emotions be getting in the way of sound investment judgment? I don’t claim to have the answers to these questions. The ultimate severity of this downturn remains to be seen and we don’t yet know if the fundamentals of our economy support the declines we’ve seen.

Emotional cycles through the market however are something we can observe and learn from. Listed below are the four main categories I identify. They are in no particular order and I’m not foolhardy enough to claim I know which stage we’re in or what segment of the stage we may be in at the moment.

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(with graph)

CAPTION: *Obtained from REMAX Market Watch Newsletter

1. Panic

Investors have absolutely zero confidence. I can’t take it anymore — get me out no matter what! The news media uses the word capitulation to describe this stage, which is often followed by despondency and depression. Remember that at least for today the world isn’t coming to an end. Hope sneaks in, evolves into relief and leads back to optimism.

2. Optimism

The markets are going up, this is great! Everyone is enthusiastic and making money is a thrill. Logic leaves the building.

3. Euphoria and greed

We’re in a bull market, everyone is elated, excited and may begin to act irrationally. With the benefit of hindsight it’s called the top of the market.

3. Anxiety

The market starts to drop. Denial, fear and desperation occur. Mr. Logic is once again MIA. The cycle is set to start all over again.

Thirty years ago the movie “High Anxiety” was popular. Mel Brooks played a psychoanalyst at an institute for the “very, very nervous.” The film was very, very funny. But there’s nothing funny about being very, very nervous about your investments. And that’s what’s happening today.

We have astonishingly short memories when it comes to the scary elements of the market. We tend to focus only on the current market environment. This can mislead us into thinking that the situation we now face is both unique and threatening.

Here are a few things to do in the meantime to take charge of your financial affairs.

Identify and prepare for any life changing events (marriage, divorce, deaths, illnesses, births)

Verify assets and liabilities; recalculate net worth and review tax returns

Reaffirm investment goals, risk tolerance and asset allocation

Review mortgages

Review tax strategies and investment implications

Update beneficiary designations on all retirement plans and insurance policies.

Review retirement savings goals, contributions and target retirement date and withdrawal expectations (IRA’s, 401(k) s, and defined benefit plans)

Review stock options, including amount and exercise dates

Review distribution planning, including required minimum distributions.

Successful investing takes strong emotional control and the ability to sometimes swim against the tide. Understanding the cycle of market emotions, and not letting fear or greed dominate you may allow you to better tolerate and ultimately profit from market fluctuations. Stay calm and stay alert.

Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. located at 606 Bald Eagle Drive, Suite 401, Marco Island, and FL 34145 provides this article. If you have questions please contact Darcie Guerin via E-mail at Darcie.Guerin@RaymondJames.com. Phone (239) 389-1041, toll free (866)-343-0882 or at RaymondJames.com/Darcie. Past performance may not be indicative of future results.