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Waiting for the Other Shoe to Drop

Investment Insights Just For Fun

This article was originally published in the blog "Money Shouldn't Hurt" on October 5th, 2012. The message is as relevant then as it is now, "Don't listen to the talking heads and don't panic".

The stock market is supposed to be a leading indicator of the economy. That means it is a good "predictor" of where the economy is going. Stocks have doubled since the financial crisis in 2008, so it seems that the market is predicting an economic recovery.

Other economic news is positive as well. The housing market seems to have bottomed out. The jobless rate has hit a three-year low. The majority of reported third-quarter earnings have been good. These all are trailing indicators, but they seem to support what the stock market has been trying to tell us.
And yet, investors continue to pull billions of dollars out of stocks. They continue to invest trillions of dollars in bonds, even knowing that the bond bubble can burst at any time.  
Why is everyone waiting for the other shoe to drop?
I consider myself a closet sociologist so I'm going to take a crack at this question.
I think it's a combination of things that have people so frightened. And none of them have anything to do with economics or research or European problems.
Have you ever ridden in a car with me? No, I guess not. I'm from New Jersey originally, so I drive, "confidently". If you are ever a passenger in my car, you'll find that your tendency will be to kick the floor in search of a non-existent break pedal. Investors have the same inclination. Many feel like they need to do something. One of my favorite investment sayings is, "don't just do something, stand there". If you've already created an investment portfolio that is diversified and if you re-balance periodically, you've already done something. Everyone knows that trying to predict what will happen is fruitless, and yet it's only natural to want to be proactive.
Another fear factor is recency bias. Many parents and grandparents to this day are still afraid of economic events that happened nearly eighty years ago. They remember the Great Depression and especially the Crash of '29 as if it were yesterday. Those events affected them so much that they have kept a generation out of the stock market and have kept a generation so frugal that they still darn socks or keep washing one pair of stockings for years. How many investors missed the roaring 90's because of the crash of '87.  Let's not let recent events do the same for our generation.
Don't even get me started on the "following the crowd" argument. All I'll say is that most people get it wrong, and yet it gives many of us comfort to do what other people are doing.
My final analysis is that it's just more fun to focus on the negative. I love Zombie movies. They're usually depressing, gross, post-apocalyptic downer movies. And I can't turn away! Look around you. Do you see people gossiping about how wonderful life is? Many people can go on all day about their problems and the problems of the world, but when something good happens, the conversations are much shorter.
Negative news is why everyone stays glued to the news reports, besides waiting for the weather report, which is strategically placed at the end of the broadcast. Negative news is as addictive as zombie movies. Don't forget, the longer you stay glued to the broadcast, the more commercials you'll watch. The Lehman Brothers collapse and the Gulf War were cash cows for CNN.
Research has shown that people who have a financial plan are calmer and more confident about reaching their goals. People who have a plan don't go in or out of the market based on current events. In fact, those who have a plan look at a down market as an opportunity, not as something to be feared.
So don't be a mindless zombie by following the crowd. Don't panic and just "do something". Don't assume that what has happened in the recent past will inevitably happen again soon. And don't get sucked into watching every negative news report on CNN.
Have a plan, drop the other shoe, put it on and go enjoy the fall weather

Tom Wright & Next Investments © 2018

(804) 591-1657