Thursday, June 7, 2012

Testing Investor Discipline

The last six weeks has been a nail biter for a lot of people in regards to the overall stock markets. We started May 1st with $140.74 closing price on the S&P 500 SPDR ETF (ticker symbol SPY). Barely a month later, on June 4th, the SPY was down to $128.10. That is almost a 9% drop in about 30 days. If you go back another month to April 1st, then you are looking at a 10% drop in price for the SPY. They say that a 10% drop in price signals a bear market.

I can tell from my technical analysis charts that I follow that there were several investors who threw in the towel the first few days of June. Sadly, those that did would have pretty much picked the low point for the year. This is typical investor behavior. They sell when their fear gauge goes up.

Those investors who stayed the course would have been rewarded, because the last three days the SPY has climbed back from $128.10 to over $133.00 a share. That is a 4% bounce back from the low and that 4% gain happened in just three days. Did you stay the course?

As I describe in my book, Keep Your Assets. Take My Advice, investors tend to look at the high point for the year as a measuring stick. In other words, they would look at their account as of the April 1 or May 1 price of around $141 and surmise that they are down 6% on SPY, since SPY is trading at $133 or so today. However, they would be totally wrong. The first day of the year, the SPY opened at $127.76. So, even though an investor would "feel" as if they had lost money and were down 6%, the truth is that they would actually be up on the year! They would be up over 4% on the year!

Think about all that is going on right now with Greece, Spain, unemployment, political contests and loads of other uncertainty. Yet, through it all, the SPY is up over 4% on the year. Can you imagine what the market may do when there are good times ahead? Suppose the SCOTUS over turns Obama's Health Care legislation. Suppose we not only get a new POTUS, but also a major change in the do-nothing Congress. This is what appears to me to be headed our way. If some or all of this happens, then I suspect the investors will be well rewarded for staying the course.

I will admit that the month of May was pretty much a downhill slide, but you cannot invest in America without being willing to take some ups and downs in the market. I can empathize with the fact that 2008 is still very vivid in a lot of investors minds. However, the solution to investing cannot be to jump in and out of the market every time that your fear gauge goes up.

You have to be brave to be rewarded.