This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Wednesday, February 24, 2010

Skeptics Shake the Street

Among the big headlines this week were the consumer confidence numbers, which came in surprisingly short of expectations, sending ripples through the financial markets. Fortunately for investors, consumer confidence, just like market sentiment, tends to be a good contrarian indicator.

Looking back over history, markets near a bottom are also typically near a bottom in consumer confidence – when consumer confidence should be high, in expectation of the coming recovery. Similarly, consumer confidence tends to be high near market peaks, when it should be low, reflecting fear among investors of the ensuing market decline.

However, what we’ve seen even more rampant in markets recently is widespread complacency. Investors remain hopeful that the market will not turn back towards its lows set in March of 2009, but they are plagued with uncertainty.

This uncertainty has led to, rather than changes in investor portfolios, to investors simply sitting on their hands and a general refusal to do anything, namely shying away from or taking on additional risk. This ‘out of sight, out of mind’ approach can be extremely damaging to investors, just as it was in the fall of 2008.

We would equate the results of this mindset to the old adage about boiling a frog. Unfortunately, this is precisely how markets tend to operate. While things can happen quickly in the market, trends develop over a longer period of time, and then one day people wake up only to realize that half their savings are gone.

Case in point: By the time many market commentators finally began coming out and saying that they thought the stock market had made a bottom in March, the market was already halfway to the highs it set last month.

Another example of this anomaly is with regard to the US dollar, which has lately been seeing increased strength as trouble spreads through European countries and doubt grows as to whether the Euro will survive.

Recently, many experts have begun saying that they expect the dollar to strengthen in the future, and we agree. However, we were forecasting relative strength in the dollar before it gained 10% against a basket of major global currencies.

Many of these developments in the markets are extremely difficult to time precisely, and given the violent market swings, due at least in part to government intervention in financial markets, which has seen a marked increase since 2008.

However, we have encountered a good deal of investors who, despite current circumstances surrounding the economy and financial markets, remain accustomed to the returns they were earning for several years leading up to 2008, when things were still booming.

Since 2008, much has been said about the ‘new normal’ and the need for investors to adjust their investing strategies to fit the new landscape. Investors need to adjust not only their strategies, but their expectations as well.

For several years, 20%+ annual returns were not uncommon among competent financial advisors. Many investors, as a result, became unrealistic in their financial expectations, just as many became unrealistic with regard to how large a home they should own, or how nice a car they could afford.

Just as is the case for consumer spending in this country, investors need to hunker down and adjust both their strategies and expectations for the growth of their savings and their prospects of retirement. It may not be what anyone wants to hear, but it’s something they need to hear if they are to climb their way out of the hole in which they now find themselves.

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