A chance encounter that I experienced a few days ago reminded me of one of the more common mistakes that many investors make on a recurring basis – focusing on the past, rather than the future, when deciding where to invest their money.
As I told a good friend of mine after experiencing that encounter, I’ve found that looking mostly in the rear-view mirror usually leads to only one outcome – a crash. That’s because one can’t foresee possibilities that might lie ahead if one focuses only on the past.
Unfortunately, novice and experienced investors alike, including many so-called investment experts, often fall prey to that pitfall by reviewing economic statistics and geopolitical events that reveal information that only concerns the past.
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For example, during late 2007, numerous economists and financial market “experts” told investors that the statistics that they were monitoring at that time indicated that the U.S. economy was in sound shape, the housing market would soon resume its 2002-2005 upturn and that stock prices were headed higher.
In direct contrast, I advised investors during September 2007 to either get out of stocks and to allocate a large portion of their assets to cash-like investments or to sell stocks short. That’s because my research indicated at that time that the U.S. economy would soon enter a recession and that stock prices would likely decline sharply during the ensuing months. (A few months later, the U.S. economy entered its worst recession since the Great Depression years of the 1930s and stock prices experienced their worst downturn since the stock-market crash of 1929.)
Many of the same “experts” mentioned above advised investors during early 2009 to remain defensive by allocating a large portion of their financial-market assets to cash-like investments and to stocks that tend to decline less than other stocks during economic downturns because several economic statistics supposedly indicated that the economy would worsen further during the ensuing months.
Once again, in direct contrast to those “experts,” I advised investors to allocate 100 percent of their financial-market assets to both cyclical and growth stocks because my research indicated that the U.S. worldwide economic recession would end during June 2009 and that stocks would appreciate substantially throughout that year.
When stocks did collapse during 2008, and after they rebounded substantially during 2009, many of the investors that heeded my advice thanked me for my supposed insight. Yet, I really didn’t have any exceptional insight.
Rather, I merely focused on economic statistics that tend to indicate the future direction of the economy and stock prices instead of statistics that only reveal what has already happened – I chose to look toward the future rather than looking in the rear-view mirror.
Note from Moneynews:
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About the Author: David Frazier
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