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July 23, 2009 at 08:00 PM
Every successful advisor, and investor, will tell you that becoming emotionally attached to your portfolio is a mistake. The reasons are obvious and easily understood.
What many do not realize is that someone else’s emotions affect your portfolio even more than your own, how so? The performance of stocks as a whole is a reflection of the investing masses’ emotions. Stocks go up, because the majority of the composite body of investors decided to buy and vice versa.
Interesting though, the composite body of investors tends to be wrong. This is a strong statement, so let’s analyze it further.
Investors were generally bullish in October 2007, in fact sentiment indicators reached extremely optimistic levels. What was the result? The S&P 500 (SPY) and other indexes dropped more than 50 percent. Mutual fund managers – the pros – got it wrong too. Mutual fund’s asset levels where at an all-time low of 3.5 percent. This means that 96.5 percent of mutual fund assets got to participate in the decline.
In the recent past, try to recall the atmosphere surrounding the March lows. Hardly anybody was talking about a market bottom, even though it was imminent. Ironically – and representative of the media’s lack of perception – the Wall Street Journal publish on article titled, “Dow 5,000? There’s a case for it” on March 9th, the day the market bottomed.
