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New Highs, Irrational Markets and You

U.S. News and World Report Smarter Investor

Stocks are soaring and investors are worried. Consider keeping some cash handy.

Plenty of people take the summers to relax, go on vacation and worry less about their investments. So if you missed it, July marked one of the best months of the year in terms of market returns. And as we head into August, the Standard & Poor’s 500 index is having one of its 10 best years since 1928!

Proof of Irrationality

Despite the tape, however, investors still show signs of wariness, hinting again at the old John Maynard Keynes quote that “the market can stay irrational longer than you can stay solvent.” It’s at times like these when common investing assumptions and models are tested. Consider these recent seemingly irrational readings of the market’s pulse:

  • According to our friends at Bespoke Investment Group, July’s consumer confidence survey revealed that the percentage of Americans expecting stock prices to rise declined and the percentage of those expected stock prices to decline actually increased. This occurred as the S&P 500 and the Dow Jones Industrial Average hit all-time highs.
  • During the first week of August, one of the worst for the S&P 500 this summer, the American Association of Individual Investors’ measure of bullish sentiment finally rose after three weeks of declines.
  • Despite disappointing recent jobs reports, with initial claims coming in slightly below expectations, markets seem to be hoping for a higher unemployment rate, or at least one that remains above the benchmark of 6.5 percent set by the Federal Reserve as the rate at which they may begin to assess the notion of increasing the target fed funds rate.

How to Remain “Solvent” or Rather, Sane

In conducting research for this post, I found an online comment to a similar post on the Motley Fool from last year, describing the opportunity here (thanks to HomeGamer1856, whoever you are): “It is the irrationality of the market that gives the prudent, patient, inspecting and skeptical individual investor a chance at making money.” In the presence of what may be an overheated market that may be the best line of defense.

Admitting you have a problem is always the first step. For those of us who have spent any time studying financial markets, we know that sometimes our models don’t work. There will inevitably be times when the relationships we rely upon seem to not exist. Fear not, however. When volatility is introduced into the market, opportunity follows, frequently in the form of attractive prices.

At times like these don’t be afraid to have a portion of your portfolio ready on the sidelines. Deciding to set aside some cash when markets are high and sentiment is low rather than trying to time precisely when reality will catch up with irrationality means you’ll have an opportunity to jump back in when clarity prevails. If the price isn’t right, wait until it goes on sale.

Kristen E. Owen is a Wealth Management Associate at Monument Wealth Management, a Registered Investment Advisory firm located just outside Washington, D.C. in Alexandria, VA. Follow Kristen and the rest of Monument Wealth Management on Twitter, LinkedIn, YouTube, Facebook, and their “Off the Wall” blog which can be found on their website.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance referenced is historical and is not guarantee of future results. All indices are unmanaged and may not be invested into directly.

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