What Scares Investors To Death

September 21, 2012

Suzanne McGee, The Fiscal Times, highlights investor’s dilemma:

Right now, there appear to be few “good” options available. As Nixon points out, the devil’s dilemma is that investors are being forced to choose between ensuring the return of their capital and having a return on their capital. Risk aversion today is completely rational – but that doesn’t matter when you’re trying to fight the Fed. Just because you are capitulating doesn’t mean that you are completely powerless; you may have to put your portfolio into risk assets to preserve its purchasing power, but it’s up to you to select which risk assets will pay off.

The part that I put in bold is what scares investors to death—the part about having to choose which assets to invest in.  The fear of being wrong paralyzes investors.  A wide range of compelling arguments are made constantly about the issues of the day.  It can become very easy to feel completely confused about where to invest…unless you have a plan.  Relative strength provides a logical framework for allocating assets in a global portfolio.  It cuts out all of the conjecture and just systematically reacts to the market with the goal of capitalizing on market trends.  Reliance on a logical game plan is essential in order to successfully navigate the global financial markets.  

Here is how different investments have done over the past 12 months, 6 months, and month.

1PowerShares DB Gold, 2iShares MSCI Emerging Markets ETF, 3iShares DJ U.S. Real Estate Index, 4iShares S&P Europe 350 Index, 5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx Investment Grade Corporate Bond Fund, 10PowerShares DB Oil, 11iShares Barclays 20+ Year Treasury Bond

HT: Real Clear Markets

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Stock Market Perception vs. Reality

September 21, 2012

It’s no secret that investors have had a fairly negative outlook toward the stock market lately.  Their negative perception shows up both in flow of funds data and in our own advisor survey of investor sentiment.

One possible—and shocking—reason for the negative sentiment may be that the public thinks the stock market has been going down!

Investment News profiled recent research done by Franklin Templeton Funds.  Here is the appropriate clip, which is just stunning to me:

One surprising finding shows that investors are likely so consumed by the negative economic news, including high unemployment and the weak housing market, that they haven’t even noticed the strength of the stock market.

For example, when 1,000 investors were asked whether they thought the S&P was up or down during each of the past three years, 66% thought it was down in 2009, 48% thought it was down in 2010, and 53% thought it was down last year.

In fact, the S&P gained 26.5% in 2009, 15.1% in 2010, and 2.1% last year.

That blows me away.  I have never seen a clearer case of the distinction between perception and reality.  This data shows clearly that many investors act on their perceptions—that the market has been declining for years—not the reality, which has been a choppy but steadily rising market.

The stock market is ahead again year-to-date and money is continuing to flow out of equity mutual funds.  I understand that the market is scary sometimes and difficult always, but really?  It amazes me that so many investors think the stock market has been dropping when it has actually been going up.  Of course, perhaps investors’ aggregate investment decisions are more understandable when it becomes clear that only a minority of them are in touch with reality!

Advisors obviously have a lot of work to do with anxious clients.  The stock market historically has been one of the best growth vehicles for investors, but it won’t do them any good if they choose to stay away.  Some of the investor anxiety might be lessened if advisors stick with a systematic investment process using relative strength—and least that way, the client is assured that money will only be moved toward the strongest assets.  If stocks really do have a long bear market, as is the current perception, clients may be somewhat shielded from it.

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Sector and Capitalization Performance

September 21, 2012

The chart below shows performance of US sectors and capitalizations over the trailing 12, 6, and 1 month(s).  Performance updated through 9/20/2012.

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