It has been my opinion that America’s much ballyhooed economic recovery has been pretty hollow. I base that on what I consider the most important economic indicators, which are not those that make the headlines. My pessimistic view has often been met with the counter argument that, “at least the stock market is doing well.” News flash: even when the stock market does well, the average individual investor doesn’t.
First, I do not consider the stock market averages leading economic indicators. By “leading,” I mean a predictor of the future; above all the market reflects sentiment – where investors believe the market is going; however, in spite of repeated warnings that “past performance is not a predictor of future returns,” very few individual investors can resist taking them exactly that way.
The average investor tends to overbuy when things look good (and are priced high) and oversell when things look bad (and are priced low) resulting in poor overall portfolio performance and a very low rate of investment return.
According to Forbes, quoting Dalbar’s Quantitative Analysis of Investor Behavior (QAIB) for 2014, “the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6 percent net annualized rate of return for the 10-year time period ending Dec. 31, 2013. The same average investor hasn’t fared any better over longer time frames. The 20-year annualized return comes in at 2.5 percent, while the 30-year annualized rate is just 1.9 percent.”
A market investment, and I have some, is a bet on the future in some form; be it future earnings, future interest rates, or future sentiment. There is a kernel of short-sellers who survive constantly betting on a crash, but just like the bets at the craps table, most people bet on the economy to win, but nothing wins all the time.
No matter how optimistic or pessimistic you are, you should always remember that for almost every share traded someone bought and someone else sold. Even those historical, and often hysterical, IPOs are a selling/buying transaction; the owners are selling some of their company to the public.
The nation’s economic trajectory will be determined, as always, by the underlying fundamentals. Sentiment and other short-term influences can push things around, but they are far less important over time than the basics.
Unfortunately, for too many people it’s the short-term good- and bad-fortune that make the biggest emotional impact giving them a daily rollercoaster ride as today’s volatile market jerks and jumps, climbs and dives. Eventually, their emotions take over and they are spurred to action, buying not to be left behind or selling to stem their losses without understanding if the move is a fundamental shift, a puff of wind, or merely the regression to the mean.
Just because the stock market is open to everyone does not mean that everyone should be invested in the stock market. Do a self-evaluation and be honest; are you educated in investing, are you financially and emotionally suited for that environment? If the answer is no to any of those questions, you’d be better off out of the market.
Of course, most people suffer from illusory superiority, they believe they are above average; this advice, obviously, does not apply to them.