How Right Is “Your Gut Feeling” About Where The Market Is Headed?

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Your head spinning with the market’s ups and downs? That’s OK, but don’t let emotions sabotage your long-term investment strategy.

At least once a week, we have a conversation with a client wanting to go with their “gut feelings” about the market.

A typical conversation?

They’ve read the market is going down (“everyone says so”), so they want to get out and wait for things to improve.

Or, they might say they’re convinced the market is ready to take off. Bonds are going down (“I heard it on CNBC”), so they want to sell bonds and pile into stocks.

Whatever their point of view, they’re certain the right course of action is to abandon their long-term investment allocation strategy and do what “their gut” is telling them.

But how accurate is that gut feeling?

Jason Zweig addressed that question in a recent Wall Street Journal column.

The short answer, he says, is you had better not listen to what your gut is telling you. It’s usually dead wrong.

Your gut feeling doesn’t actually offer you any insights into the future.

According to research from Yale University, it merely recaps recent trends and events, and naively assumes those trends will continue into the future.

If the market’s been down for three months, you assume it will keep trending lower. Market doing well? You assume it keeps hitting new highs.

“Investors’ forecasts regularly look more like aftercasts — simple projections of the recent past into the future,” says Zweig, summing up the Yale research findings.

These naïve and erroneous assumptions are what get investors into trouble when they follow their “gut.”

They can lead even savvy investors to pile into ever-climbing markets – like tech stocks or real estate – and then get creamed when the inevitable bubble pops. Emotionally-based “gut feelings” can also encourage investors to bail from long-term investments and sell at the worst possible time, causing them to lock in losses and miss the subsequent rebound.

“Investors tend to be complacent when they should be worried and afraid when they should be optimistic,” according to Zweig.

It’s no surprise that investors’ gut feelings were at “maximally pessimistic” levels in February 2009, right before the market bottomed and a new bull market took off.

So here’s the takeaway: You need to stick to your long-term investment strategy regardless of what the market is doing. That investment roadmap – the one you determine in consultation with your financial advisor – is designed to help you reach your long-term investment and lifestyle goals. It’s OK to acknowledge your fears and anxiety, but don’t let them sabotage your future by hitting the “exit” ramp every time you hit a speed bump.

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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