We’ve shed a few tears at the Scheidt house this holiday season.
Just before Thanksgiving, my daughter called me from college. I knew from the tone of her voice exactly why she was calling.
She and her boyfriend broke up. And since this is my daughter who feels things deeply (she gets that from her dad), she was heartbroken.
As I tried to console her over the phone, she talked about what to do next.
One thought was to jump in the car and drive home right away. Or maybe stay a couple of days and pack up her dorm room, quit school and come home for good.
Fortunately, I was able to convince her to just come home for Thanksgiving and let things settle.
We had a great holiday break. She got caught up on sleep, laughed with her siblings and enjoyed some home cooking.
And by the time school started again, she was in a much better place.
I’m thinking about our time together this week as we kick off a new emotionally-charged week in the markets.
As we head into the end of the year, it’s going to be extremely important to keep an eye on the emotional swings that investors take and make sure that we’re keeping a level head with our retirement decisions.
How Emotional Investing Drives Market Swings
The day-to-day swings in the market are heavily affected by investors’ feelings.
That might seem odd in a world of profit and loss statements, balance sheet analysis and cash-flow considerations.
But each day, investors decide to buy or sell based on how they’re feeling about the economy, prospects for future growth and how they expect things to turn out in Washington — just to name a few variables.
We often see greed take hold and drive stocks higher. And these surges can’t always be justified by the actual numbers.
Instead, they’re driven by emotions like greed or the fear of missing out on a good run.
Other times, investors start to worry about a particular risk. We saw this at the beginning of the coronavirus crisis and plenty of other times in history, including the financial crisis, the dot-com bust and many other fearful market crashes.
The sad thing is that when investors act on fear or greed, it almost always turns out bad.
Here at Rich Retirement Letter, we’ve talked plenty of times about the temptation to sell when things look fearful and to buy when things look great.
While it’s a lot harder to do, a wise investor will buy when times are fearful and take some profits off the table during times of euphoria.
That’s a great way to sell low and buy high!
As the famed banker and businessman Nathan Rothschild said:
“Buy to the sound of cannons, sell to the sound of trumpets.”
In other words, buy during times when it feels ominous and sell when everyone is celebrating.
That’s how wise retirees build their wealth over time!
Evaluating the Current Market Sentiment
As read through my research this weekend, I was intrigued by the latest data from the American Association of Individual Investors (or AAII).
The research firm publishes a widely followed assessment of investor sentiment. This report shows us how confident (or fearful) investors are feeling.
And over time, the data has been used as a contrarian indicator.
When the indicator shows that most investors are bullish, it’s important to be cautious.
And when the indicator shows that most investors are bearish, we should look for opportunities to buy.
Here’s a quick snapshot of where investor sentiment is today.
As you can see, nearly half of individual investors are bullish. That means they expect the market to trade higher, which is well above the historic average of just 38%.
While this isn’t an extreme reading, it’s high enough to raise my eyebrow.
Given the market’s strong surge to new highs despite the rise in coronavirus cases and the heightened level of optimism from AAII’s survey, it’s time to be a bit more cautious with your retirement investments.
Does that mean you should go out and sell your stocks and hunker down with cash?
No way! You know that I’ve always encouraged you to keep a balanced approach with your retirement.
But it does mean that if you have positions that have run sharply higher, now may be a good time to take some profits off the table.
I often recommend selling one third or even half of a profitable position.
This way if the stock continues to run higher, you can still make money.
And if our sentiment indicator is pointing to a temporary lull or pullback in the market, you’ll have a bit of extra cash on hand to buy the next opportunity at a discount!
Changes Ahead — Let’s Make the Most of Them!
As we head into the end of the year, several important shifts are happening in the economy and the market.
We’re getting close to having widely available vaccines to help decrease the risk of coronavirus.
And regardless of what you think about the safety of these vaccines, their availability will certainly cause changes in how we live our daily lives.
At the same time, we’ll witness a change of power in Washington with a new president taking office and some shifts in the balance of power in Congress. Markets will be adjusting as we learn more about what policies will be implemented.
And then there are some economic issues that will affect sentiment in the market.
- Will jobs continue to be created or will we have another employment slump?
- Will inflation pick up? And how will that affect interest rates?
- How resilient will small business profits be as we transition out of the coronavirus crisis?
- Will tax rates rise? If so, how will the market respond?
All of these questions (and more) will affect investor sentiment and help to drive shares of different stocks higher and lower.
Here at Rich Retirement Letter, I’ll be giving you much the same advice that I gave my daughter.
When times get turbulent and you feel like you need to make a dramatic move now, the best thing to do is take a deep breath, take a calm look at your surroundings, maybe pause to laugh or take a walk…
And then sit down and make a rational decision.
I’m excited about the opportunities we’ll be faced with as we head into the end of the year and 2021. I hope you are as well!
Just please don’t let drama from the financial media cause you to make any rash decisions. Let’s invest wisely and carefully and watch our retirement wealth accumulate.