If you ask the individual investor, the answer is "no one." Not after the likes of Bernard Madoff, Allen Sanford and, now, Goldman Sachs, the crown jewel of investment banks. So, if you follow the thinking of the individual investor by measuring "Investor Sentiment," you would have drastically cut back in stock investments in December, 2008, and you would not have returned to the stock market yet.
In other words, you would have sold near the market low. No wonder Warren Buffett cautions, "Be greedy when others are fearful; be fearful when others are greedy."
I follow a proprietary investment model that measures twenty one economic indicators. I've built this model over a period of over twenty years, and use it exclusively for two purposes:
- It is my model, and I use only data from apolitical, independent sources for analysis. That keeps me protected from data that may have been skewed by someone who has a vested interest in whether I choose to invest or not;
- It removes all emotion from investment decisions. If it says that I should be 70% invested, I'm 70% invested. No panic. No euphoria. No need to trust anyone but me.
Discussing each indicator, and how it relates to the overall decision was the subject of a semester's work in an advanced class at UCLA for professional financial planners who chose an emphasis in investment. Mostly geeks. I will, however, discuss one part of this analysis, Investor Sentiment, and tie that discussion to the general feeling of mistrust that is currently pervasive with the individual investor.
If you had followed Investor Sentiment as discussed above, you would have sold when the S and P 500 was at 888.61. It is now at 1192.13. As reflected above, you'd have sold low and, if you buy back in, it will undoubtedly be higher.
If, on the other hand, you would have read Investor Sentiment as a negative indicator, i.e., you did the opposite of what it suggested, you would have enjoyed a 34% increase. Hmmm. I'm reminded of what my grandmother said when I based my plea to do something on, "Everybody else is doing it." Her familiar response was, "If everybody jumped off a cliff, would you do it, too?"
So, now we have both Warren Buffett and my sweet little Meema advising us to think for ourselves, and even consider doing the opposite of what others are doing. In the particular case of the last market correction, that would have been good advice. But, does it hold true most of the time?
As it turns out, yes. Investor Sentiment is the most predictive of all twenty one of my indicators, if you do the opposite of what it says to do. And, I will add, that the stock market is nowhere near the bargain it was in March, 2008, when its cost (P/E) was about its long term average of $15.82 for every dollar of S and P 500 earnings, but even though the market has come back 75% from its low (25% lower than its high), the individual investor is still not buying.
Back to trust. Yes, Bernie Madoff is a thief. Yes, Allen Sanford appears to have bilked thousands of investors out of their money, touting "safe" international CDs. Yes, it looks like Goldman Sachs took both sides of the bet that the housing bubble would burst. But does that mean you should keep your money in the bank? Let's take a look at how that will work for you in the long term.
The best rate I could find for a two and one-half year insured CD was 2.1%. To calculate your "real return," that is, your return after inflation and taxes, subtract from that 2.1% the current inflation rate, or 2.1%. Now you're at zero, but you still have to pay taxes on your interest. For most people, your marginal tax rate is about 16%. 16% tax on 3% is .48. So, tax of .48 plus inflation of 2.1 is 2.58. 2.1 - 2.58 = -.48 You're losing about 1/2% annually.
If you're a woman with $100,000 that must last you for 30 years, at that rate, this money will produce about $3100 per year. On the other hand, if you were to invest in the stock market, using its long term average return of 9%, this money will produce about $9,700 per year.
We live longer. Inflation hits us harder. We can put our money in "safe" investments that are guaranteed to lose money over the long term, or we can listen to Warren Buffett and my sweet little Meema.
The choice is yours.