Daily Gains Letter

Don’t Make This Investor Mistake

By Sasha Cekerevac for Daily Gains Letter |

DL_Sasha_1One of the hardest things for a person to do is to go against the crowd. As investor sentiment starts to spread, an individual has an increasingly hard time looking past the short-term gyrations and focusing on the long term. This lack of ability to separate oneself from the herd of investor sentiment has led to a famous occurrence: that the majority of people are wrong when it comes to investments.

By the time everyone starts to take part in an investment, this is when one should be looking to exit. Investing in stocks was viewed as a great investment, right before the crash. After the crash, investing in stocks was then viewed as a horrible place to put capital; but that was exactly the best time to buy stocks.

One needs to take advantage of shifts in investor sentiment. A great example has been the shift in assets by investor sentiment since 2008. According to EPFR Global, since 2008, bond funds have seen an inflow of $1.1 trillion, while equity and money market funds have seen an outflow of $793 billion. (Source: “Desperately Seeking Yield,” The Economist, November 10, 2012, last accessed December 11, 2012.)

The low-rate environment is pushing investor sentiment into any yielding asset. Plus, the recent decline in stocks is scaring people away from investing in stocks. In fact, this should be the exact opposite for the average investor. When people are pulling out of stocks, one should be looking to buy them.

To gain long-term wealth, one must move in the opposite direction of investor sentiment when it is at extreme levels. When there is extreme optimism in an asset class, look to exit and accumulate an asset class that is showing signs of extreme bearishness.

When comparing U.S. Treasuries to equities over the next 10 years, I think it is quite clear that investing in stocks should prove to be a much better asset class. Even if one were to look at the SPDR S&P 500 (NYSEArca/SPY) exchange-traded fund (ETF), this index yields over 2.1%, with the benefit of potential capital appreciation.

Investor sentiment has become too bullish on interest rate assets in relation to equities. Investing in stocks is best utilized when the relative value becomes attractive. Historically, it is very rare to get the S&P 500 to offer a larger yield than a 10-year U.S. Treasury. Even with 2012 being a great year for the stock market, there still remains quite a lot of relative value.

But, you might be worried about the effects of the fiscal cliff. If nothing prevents us from going over the cliff or cushions the fall, the person interested in investing in stocks for the long-term will look at any large pullback as an obvious buying opportunity. Taking advantage of any misallocation of investor sentiment is crucial to generating long-term wealth.

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