Client Survey Results – 1/18/13

January 29, 2013

Our latest sentiment survey was open from 1/18/13 – 1/25/13.  The Dorsey, Wright Polo Shirt Raffle continues to drive advisor participation, and we greatly appreciate your support!  This round, we had 63 advisors participate in the survey. If you believe, as we do, that markets are driven by supply and demand, client behavior is important.  We’re not asking what you think of the market—since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients.  Then we’re aggregating responses exclusively for our readership.  Your privacy will not be compromised in any way.

After the first 30 or so responses, the established pattern was simply magnified, so we are fairly comfortable about the statistical validity of our sample. Some statistical uncertainty this round comes from the fact that we only had four investors say that thier clients are more afraid of missing a stock upturn than being caught in a downdraft. Most of the responses were from the U.S., but we also had multiple advisors respond from at least two other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?

Chart 1: Greatest Fear.  From survey to survey (it’s been just over 1 month), the S&P 500 rose nearly +5%, and our indicators responded as expected.  The fear of downdraft group fell from 83% to 75%, while the upturn group rose from 17% to 25%.  The market is off to a strong start this year, and client sentiment is showing strong signs of improvement after a lackluster end of 2012.

Chart 2: Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups.  The spread dropped by a large margin, down from 65% to 49%.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite.  Average risk moved strongly upwards, from 2.54 to 2.83.

Chart 4: Risk Appetite Bell Curve.  This chart uses a bell curve to break out the percentage of respondents at each risk appetite level.  This round, over 85% of all respondents wanted a risk appetite of 3 or less.

Chart 5: Risk appetite Bell Curve by Group.  The next three charts use cross-sectional data.  The chat plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups.  We can see the upturn group wants more risk, while the fear of downturn group is looking for less risk.

Chart 6: Average Risk Appetite by Group.  This round, the upturn group’s risk appetite average fell, while the downturn group’s rose.

Chart 7: Risk Appetite Spread.  This is a chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group.  The spread fell this round.

The S&P shot out of the gate for 2013, and client sentiment responded favorably.  The fear of losing money in the market percentage declined to 75%.  Average risk appetite climbed steadily with the market.  If the stock market can manage to put together a rally over the first six months of the year, we definitely have a chance at seeing some of the best client sentiment in the history of this survey.

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride.  A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments.  Until next time, good trading and thank you for participating.

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From the Archives: Getting Torched By Expert Opinion

January 29, 2013

Barry Ritholtz has posted a 5 minute clip of some of Ben Bernanke’s public comments between 2005-2007 on the housing market and the broader economy.  The point of me posting this is not to say that Bernanke is a complete moron because I have little doubt that he is one of the brightest financial minds in the country.  However, talk about being dead wrong!  If you relied on these opinions in order to make investment decisions, you likely got torched.  If you can’t rely on expert opinion when making investment decisions, then what options do you have?

This highlights the value of trend-following systems.   Trend following requires zero reliance on expert opinion; it simply allows the investor to adapt to whatever trends the market offers, whether or not experts expected things to play out in a given way.  With trend following, you’ll have plenty of losing trades, but you’ll also avoid sitting in losing trades for long periods of time.  Furthermore, systematic trend-following has an excellent track record (see here and here.)  Trend following allows you to cut your losses short and to hold on to your winners.  Frequently, the strongest trends end up being very different from what even the brightest experts predicted.

—-this article originally appeared 2/11/2010.  Well, heck, if you can’t trust Ben Bernanke, who can you trust?  The answer should be obvious: follow the price trend and forget about the random guessing of experts.

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