Europe Fears Caused Retail Investors To Miss An Epic Market Rally. Lessons Learned

by ETF Base on February 9, 2012

If the past few months have not been a lesson in strategy over tactics, I don’t know what is. While the mainstream media has pounded viewers with negative news, US equities have been on a complete tear, putting the NASDAQ at highs not seen for the past decade. Just year-to-date, the NASDAQ (QQQ) is up 12% and the S&P500 (SPY) is up 8%. Markets seem to be “defying logic”. Just as my kid yells at the Wii that “the game cheats” when his Lego Batman is killed, retail investors are yelling that the market should be imploding with the world in such chaos. Greece is completely insolvent, as is much of the EU, the Middle East is in revolt with the replacement governments LESS stable than the dictators that preceded them, the US debt continues to balloon and we’re on the verge of an outright way with Iran. How could the US stock market possibly be rallying?

This is one of life’s great mysteries. On one hand, you might say that all these developments are old news and were priced in….or they just don’t matter. On the other hand, you could say that these negative developments have been counteracted with more favorable developments in corporate earnings, a business-oriented frontrunner GOP challenger to Obama, or any other number of things. There’s certainly something to be said for a lack of other places TO go. With the Fed’s zero interest rate policy in place through 2014, this is certainly pushing money into equities as well as the junk bond rally that saw record inflows last week as well.

The bottom line is that no one investor can possibly digest all this information, let alone make predictions on how the chaotic market movements relevant to each individual piece of information will be reflected in market direction.

Lessons Learned: Stick To Your Strategy

Similar to the people (we all know at least one) who pulled all their money out of their 401(k)s and trading accounts during the market crash of 2008-2009, there will always be people who are fearful when others are fearful and finally become greedy when others are too. They sell low, buy high, and sit out the rallies. Rather than trying to outsmart the market and the machinations of global events, investors really need to understand what their strategy is, why they’re employing it, and stick to it. That’s not to say the same strategy is appropriate for everyone. Some choose to focus on broad diversification across several asset classes, some have various options strategies, alternative investments or a focus on low-cost and free ETF trading to match index returns from an “efficient market theory” standpoint. Whatever the strategy is, more times than not, when retail investors deviate due to emotional reactions and fear, they end up as net losers.

Disclosure: No positions in any ETFs cited herein.

{ 1 comment… read it below or add one }

101 Centavos February 21, 2012 at 10:24 pm

These are the times when an averaging-down strategy pays off. Gotta stick with what you know!


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