Investor sentiment

Back in 1999, I recall meeting with clients regarding their financial planning. At the time, most people were enjoying stellar returns in their tech-heavy portfolios and they tended to be unrealistically optimistic. When I would suggest the assumptive rate of 10 percent for future planning purposes, they would typically chastise me for proposing such “conservative” assumptions. After all, they had grown accustomed to earning 25 to 30 percent per year for the last several years. Obviously, in retrospect the overwhelming bullish sentiment of the times was unwarranted.

Today it’s quite a different story. Most investors I meet with are expressing pessimism about the market’s future prospects. “The market seems overvalued.” “We are due for a correction.” These are the typical comments I hear from many clients; most indicate they would be satisfied with an 8 percent annual return. This is quite a contrast from the late 1990s. In a recent BofA Merrill Lynch survey of fund managers, it was revealed that investors have been increasing their allocations to cash, while cutting their equity exposure to an 18-month low.

I would recommend that investors refrain from following their gut instincts when it comes to investing. If you are feeling that we are due for a big market correction, then most likely you aren’t the only one who feels that way. The market rarely behaves the way the masses expect it to. Therefore, I would encourage you to avoid making investment decisions based on your feelings or instincts of how the market is likely to perform in the short term. If you have created the proper asset allocation that is consistent with your risk tolerance, you should stick with it. Do not succumb to your fear or greed and stray from your plan. The most successful long-term investors are able to avoid becoming short-term investors.