Pessimism Breeds Investment Failure

By on August 17, 2006

Originally published in January 1998:

1997 has flown by. The “real world” portfolios made acceptable gains, but couldn’t come close to matching the 31 percent return of the S&P 500 index. The portfolios have a worldwide bent to them and the comparison against globally oriented funds is more favorable. Risk management is one of the primary goals of both portfolios and the volatility experienced was low. Only one signal was generated and that was a sell signal in June.

There has been lots of chatter about the possible deflationary effects of the financial “meltdown” in Asia. Undoubtedly, we will experience a deflationary effect in some areas of the economy, but it will be contained to a few industries such as electronics, clothing and autos. As long as deflation doesn’t spread to other industries, which it is unlikely to, there will not be a negative effect on U.S. stock prices. Interest rates should continue the long term downtrend which will lend further support to stock prices. This does not rule out fear entering the psyche of the investing public and creating an unusual buying opportunity. The Asian situation could get uglier as more banks and securities firms go under from the hyper aggressive lending practices that were prevalent. However, this purging of excesses is a healthy process which will make their economies more efficient and, in the end, more stable.

Pessimism Breeds Investment Failure

There some widely followed analysts that would bet against future prosperity, but have been incredibly wrong this decade. It is folly to bet against the pervasive uptrend of human creativity and inventiveness. The U.S. market has risen an average of 11 percent a year over the last century, and has gone up approximately every two out of three days of trading. This is an incredible bias to the upside based on the progression of the human species. There is very little chance that this progress will be but temporarily interrupted. An investor “really” has to know something, or be incredibly lucky to bet on a down market and get it right. Those who claim they know, usually don’t, and few are lucky enough to time markets so well as to successfully recommend a 100 percent stock or cash position at any moment in time. Therefore, investors should base most of their decisions on buying stocks rather than selling. Equities should be accumulated consistently during a person’s working and saving life.

Investing Challenges

The tendency after a long climb such as the one experienced over the last three years is to wish for a greater allocation of assets to the stock market. This urge needs to be controlled because it is caused by mistaken logic. The tendency is the same after a prolonged drop in prices. Many investors wish they had a lighter allocation to stocks after a plunge in prices and act on this urge by selling when they should be buying. These idiosyncrasies of stock market investing make it incredibly challenging to do better than the popular market averages.

Portfolio Updates

Software services consulting firm Keane, Inc.(AMEX: KEA; 39) signed their 435th year 2000 contract with Janus Capital, the mutual fund giant. KEA is very close to becoming 10 percent of the aggressive portfolio. In the event that it does, half the position will be sold and another security purchased.

Recommended Allocations

Aggressive portfolios: 75% equities, 25% cash.

Conservative portfolios: 55% equities, 45% cash.

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