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Kevin Fusco: What to do when perception betrays reality

Investing is often a very sensory process, with what we see, hear and feel shaping our perspectives.

In many facets of life, our perception — or what is deduced from those sensory inputs — is the guiding factor in decision making, but what happens when those perceptions and overall perspective contradict what is actually occurring?

To a very large extent, this is what the average investor is combating right now. The financial markets have defied most people’s perception that things are worse than what has actually been exhibited by recent performance.

The equity markets have long been viewed as a forward-looking indicator, priced to reflect how investors feel companies and the overall economy will perform over near-term business cycles, usually measured by earnings growth.

Right now, investors feel that the markets are poised for a pullback. The August reading of the Spectrem Group Confidence Index, which measures the outlook of millionaire and affluent investors, dropped to its lowest level in 10 months. While obviously only a small portion of the overall investor pool (by participants, not assets), affluent investors are often a good demographic to track.

The low confidence measure is also not hard to understand. Respondents cited concerns over sluggish economic growth and pessimism about job prospects as leading factors for their responses, confirming that they feel as though things are moving in a decidedly negative direction.

‘Fiscal cliff’

A number of other concerns could have been added to this list as well: continued problems in Europe, economic slowing in China, the presidential election, the “fiscal cliff” issues are just a few. Yet all of these problems existed in March of this year as well, when the Spectrem index reached its 12-month peak.

The perception that things were getting worse, which may or may not have been the case, caused the index to fall for five of the next six months as investor confidence eroded.

What is surprising, and sometimes harder to understand, is how perception skews perspective. As the confidence index dropped to its 12-month low in August, the equity market, as measured by the S&P 500 Index, posted year-to-date gains of more than 10 percent. When measured from the index peak in March, the S&P 500 still managed to earn a modest gain, even though confidence fell from its recent high. Plainly, there isn’t always a direct correlation between how investors feel about the market and how the market is actually performing.

Often times, investor perspective is too focused. As an example, an unemployed person whose home is in foreclosure may feel that the economy, and thus the markets, are performing horribly since he or she faces dire circumstances.

Rewarded for patience

More frequently, investor perspective is too abridged. While the past few years have certainly been fraught with volatility and uncertainty, investors who remained dedicated to the equity markets were rewarded for their patience. However, this is not to say that all investors understand the scope of gains exhibited during this bull market, which has now lasted almost 1,300 days. Since March 9, 2009 through the end of August 2012, the S&P 500 has earned almost 108 percent, but has had to fight doubt and pessimism the entire way, and from all fronts.

It would be naïve to suggest that investors turn off their feelings and rely strictly on logic and facts, as emotions will always play a part in financial decisions. What would benefit the average investor is being conscious to not let their perceptions skew their perspective. While, again, this may be easier said than done, it is something that investment professionals and experienced investors largely credit as imperative to long-term success. The ability to set aside personal bias and emotional responses to market trends or economic outlooks will help to set the proper focus and scope within which the best decision can be made.

Kevin Fusco is senior vice president of Fusco Financial Associates Inc. of Towson. He can be reached at 410-296-5400, extension 109, or Kevin.Fusco@LPL.com.

 

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