Too few individual investors how to use Investor Sentiment to their advantage. Last week when the New York Times ran a front page story regarding individual investors fleeing equity mutual funds in favor of bond mutual funds, it should have made any long term Socially Responsible Investor giddy with glee.
Why?
Extreme negative sentiment as depicted in the NY Times should be used as an inverse barometer of when to invest. However, more often group think sets in and investor is intimidated by being the lone wolf buying shares while the herd is stampeding in the other direction.
Right now, sentiment as expressed by the American Association of Individual Investors is getting extremely negative….and thats a good thing. Who’s left to sell when only 21% of members polled are positive on the markets? 21% happens to be one of the lowest polls recorded in the past 15 years. You may be right in your views of why you want to sell…….but, and this is the tricky part that the majority of investors never learn to master: You may be right in your thesis but if you’re in the majority with your views, chances are your opinions have already been absorbed by the markets.
Using data supplied by www.sentimentrader.com:
Since 1987, there have been 47 instances where AAII sentiment fell to 21% or below. The results are:
3 months later: the average return was 5.8% for the S&P 500 with 98% of the 47 instances positive.
6 months later: the average return was 10.9% for the S&P 500 with 91% of the 47 instances positive.
In conclusion, many investors think they can manage their assets completely on their own but unfortunately do not know how to interpret sentiment data. Going against the herd is never easy but you must be able to master your emotions in order to be a successful investor, otherwise you might consider hiring an adviser who’s weathered a great many storms in their career.