An interview with Gary Ran from Telemus Capital Parntners appeared during late August in Barron’s, a popular financial weekly, who noted that during market turmoil it was “hard for investors to stay focused in times like this, just when you need it the most, because there seems to be so much information But information isn’t knowledge.”
Do you mean that all the information that is thrown at us over the internet doesn’t amount to the knowledge necessary to manage our own portfolios? In our opinion, if it is combined with the appropriate educational background, knowledge of how businesses operate, an ability to decipher financial data and the jargon that does along with it, a temperament that is conducive to dealing with turmoil and experience, it certainly does. Otherwise, it may not. The problem arises when an investor discovers that they do not have one or more of these qualities only after it is too late.
For example, let’s say that after coming home from work on August 23rd you turned on your computer and logged on to the internet to check out how the stock market did that day. You would have discovered that the Standard & Poor’s 500, the most widely followed stock index, had rebounded nearly 40 points, but over the past month it had declined from 1,345 to that closing day value of 1,162 for a decline of 13.60%, a drop that resulted in a loss of $34,000 on your portfolio of $250,000.
What do you do? Perhaps you look for some perspective from a trusted source, CNBC and log onto their website. You scroll down to an article entitled “It’s ‘Only Just Begun,’ S&P Fair Value 800-900: Analyst.” You read on and discover that Bob Janjuah, co-head of cross-asset allocation strategy at Nomura Securities, stated in a research note that the bear market “process has only just begun. It will not be a straight line down, but the secular (bearish) trend for risk assets is, to me, now clear and, with hindsight, this bear leg began in Q2 2011.”
Furthermore, Mr. Janjuah notes that “in this world, and using the S&P 500 purely as a risk proxy, I see ‘fair value’ for the S&P down in the 800/900 area. I think we will see these levels trade in the next 12/15 months. And we may even undershoot to levels last seen at the lows of Q1 2009.”
You quickly do a mental calculation and conclude that this implies another 22.00% decline at best and nearly 43.00% at worst. After picking yourself up off the floor you immediately call your advisor and immediately sell everything.
Was that the right action to take? Forget about whether or not it has been profitable (and as of this past Friday it has not), was it the correct move. In our opinion the answer is no. It is not the timing of the stock market but rather the time in the market that has historically resulted in investors reaching their goals.
In addition, generally speaking, many investors tend to focus too much on the day-to-day fluctuations in the stock market and not enough on their goals and objectives. Finally, some investors mistakenly make “all or nothing” moves. They are either “all in or all out” depending upon the latest news report, earnings hit or miss, political event or analyst comment. Our recommendation when it comes to investing is similar to life, everything in moderation. If you are feeling a little skittish about the direction of stocks, raise a little cash. If you are feeling bullish about the direction of stocks, then put some of that cash to work.