A Three-Step Plan to Surviving Market Paranoia
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, November 2, 2011: Issue #1634
It’s amazing how quickly things turn around.
For years now, it seemed as if everyone was bearish, believing the economy was in the toilet and that we’d never emerge from an eternity of doldrums.
Then a 10.8-percent market rally in October had many people feeling more bullish than they’ve been in years. Suddenly, sentiment indicators turned more bullish.
The American Association of Individual Investors’ weekly sentiment poll shows 43 percent of respondents are bullish. That compares with 33 percent one month ago. Bears decreased to 25 percent from 47 percent.
Then, yesterday, the Greeks decided the gift that the other European governments were giving them (forgiving 50 percent of their debt) may not be such a gift after all. They decided to put it to a vote of its citizens – the same citizens who have fought austerity measures and are famous for systemically refusing to pay taxes.
That’s like a suspect who’s been offered a plea, asking his accomplices what they think he should do.
As a result, the market sold off hard Tuesday morning.
Like Europe, the United States has its own problems. Unemployment is still way too high and many people are struggling. But last week’s report that GDP grew 2.5 percent in the third quarter was certainly welcome news. You have to walk before you can run.
Along with the solid GDP number, corporate earnings have been excellent. In the third quarter, of the 324 S&P 500 companies that have reported earnings, 71 percent have beaten expectations – significantly higher than the 62-percent average over roughly the past 20 years.
Even with the market’s big October rally, the S&P 500 is only trading at 12 times forward earnings. That compares with the historical average of 14.9 since 1980. That suggests the market has another 25 percent left in it just to return to its historical average.
Granted, it’s not all lollipops and rainbows out there. Fourth-quarter earnings estimates have actually come down three percent in recent weeks (although that makes them easier to beat). The savings rate is once again declining and disposable income fell 1.7 percent in the third quarter.
Things are in a constant state of flux. One day, the European economy is about to collapse. The next, a deal is reached on Greek debt and investors are buying stocks with both hands. Then the deal falls apart, a major brokerage goes bankrupt and may have misallocated customers’ funds, but then Pfizer (NYSE: PFE) produces stellar earnings.
As an investor (as opposed to a trader), you can’t react to every news event or data point.
Last night, my wife was trying to talk someone down who was freaking out about how bad things are. It seems as if our world is always worse than it was before. We pine for the good ol’ days.
But were those days really so good?
The 1960s were marked by the assassination of a President, the beginning of a nasty war and civil unrest across the country.
In the 1970s, a President committed a criminal act and was thrown out of office. He was followed by two ineffective Presidents. The economy was in the toilet, inflation was in the high teens and we were afraid the Russians would start a nuclear war.
The 1980s were marked by greed, selfishness and really bad hair. We were still petrified of the Russians as Sting eloquently sang, “I hope the Russians love their children, too.” Oh yeah, and we invaded a couple of countries.
In the 1990s, politicians spent tens of millions of taxpayer dollars to confirm that a President had an extramarital affair. Then that President lied under oath about it. Fortunately, the economy was hot so we didn’t really care that much. Nor were we concerned that terrorism against U.S. interests was on the rise.
And last decade of course saw a terrorist attack on U.S. soil, the bursting of two asset bubbles, the near collapse of the financial system and the worst recession since the Great Depression.
There are always things to be worried about. Reasons why you shouldn’t take any risk. At the same time, you can always point to statistics like the ones I mentioned above that justify getting into the market at any particular time.
The point is that, as an investor, you should have a plan. Don’t rely on whims or intuitively knowing the right time to buy or sell. You will be wrong. Guaranteed. Timing the market is next to impossible.
To make money in the markets you need to be invested for the long term.
And here’s how to do it:
- Allocate your assets across a spectrum of classes, including international stocks, domestic stocks, bonds, precious metals and real estate. For a simple formula that has been proven to beat the S&P 500 with far less risk, take a look at The Gone Fishin’ Portfolio.
- Don’t watch CNBC. The financial media thrives on scaring you so that you’ll be forced to watch even more of their nonsense and react accordingly. Ignore them and your portfolio will be much better off.
- And finally, invest in stocks that have a history of raising their dividend every year. If you’re seeking income, you can achieve impressive yields in just a few years as the dividend gets raised. For wealth builders, the power of compounding dividends generates huge returns when you reinvest the dividends over the years.
Stick to your plan and over the years, you should be more than fine.
Good investing,
Marc Lichtenfeld
Article by Investment U
