Tracking Investor Sentiment
Investors feel like buying again!
According to the weekly survey of investor sentiment done by the American Association of Individual Investors, investors haven’t been this bullish since April 15, 2010 (only days from the high for the year).
But wait, according to the exact same survey done just two weeks ago, investors were more bearish than they had been in over a year.
I’m confused. What changed in two weeks? The only thing I know for sure is that the market was up 5 percent between the time investors wanted to sell and the time they wanted to buy.
This whole thing is crazy.
Why in the world is there a weekly survey of investor sentiment?
We know that real people have a tradition of buying high and selling low. We’ve been doing it for a long time (read about the tulip bulb craze for a reminder). We do it over and over, despite knowing better. And we do this because we make investing decisions based on how we feel instead of what we know. This is natural, maybe even genetic. We run away from things that cause us pain, and we want more of the things that give us pleasure or safety.
But we need to stop it if we’re going to get a different result!
I’m not sure what the answer is. In fact I am pretty sure it’s never going to change. No matter how many people throw facts and figures at us about holding on for the long term, no matter how many rational arguments people make, we’re going to run if we get the sense we’re about to get hurt.
So what can we do about it? Here are a two ideas:
1. Swear off the stock market forever. Look, the reality is that making money in the stock market is hard. Most of us just don’t have the emotional makeup to do it. That’s OK. If during the last 10 years you’ve found yourself making big behavior mistakes over and over, then stop. You might be better off just committing yourself to a life of owning only certificates of deposit, given how poor your stock returns could be if you trade too much.
2. Act like you have a blind trust. Find someone you trust, give them your money, tell them to buy you an index fund and then have them update you again in five years. This could be a financial planner like me, but you could also enlist a trustworthy friend who won’t charge you anything for the privilege.
I know that there are people who have been successful, people who behaved correctly. If you are one of them, congratulations and keep doing what you’ve been doing.
But we have to recognize that the way most of us have been doing things hasn’t worked, and it probably won’t work in the future.
This sketch and post originally appeared at the New York Times on September 13, 2010.