By: John P. Napolitano, CFP®, CPA, PFS, MST

Investment professionals all have their own styles of performing investment research.

Some are top down economists working with big picture trends and others are bottom up investment selectors looking for the specific investment that they feel will add the most value to an overall portfolio.

Individual investors, on the other hand, rarely have such formal discipline, and use everything from water cooler talk, media reports and headline news to make selections. Since the last economic meltdown in 2008–2009, if your investments were dominated by large, US companies… you probably did ok. But at this time, sentiment amongst the general investment public is not that favorable.

Investors are worried about the impeachment news, China and global tension. Oddly enough, however, another indicator that investment professionals rely on is investor sentiment. Many experts look at this sentiment reading as a bit of a contrarian index. Generally, when the public is down on investing, many professionals see that as a sign of market strength in that the individual investor is frequently wrong.

The odds of being right with your market sentiment readings are indeed very low. Simple math learnt in college statistics will bear that out. If you are guessing, you’ve got a 50/50 shot at being right. This means you have a 50% chance of being correct if you chose to lessen your risky assets and then you’ve got a 50% chance of getting it right when you decide to re-up your holdings of risk assets. To win, you must guess both sides of the equation correctly, and in mathematical terms this means that you have a 25% chance of being right.

Flash to today’s news circus and what it means for the anxious, guessing, DIY investing public. You too have only a 25% chance of getting it right if you get so spooked that you eliminate all risk. Historical analysis of financial markets can show all of the world’s freaky events as they’ve transpired over the last 100 years and their resulting effect on the financial markets. You may be surprised to see how markets reacted to historical issues that make today’s headline news seem pretty tame. So what do you do?

Start by understanding how much you must earn on your portfolio to meet your life’s financial needs and objectives. Then understand that unless you invest 100% of your money in guaranteed holdings, you must take on some risk. Evaluate how much risk you’re taking. There are plenty of tools to measure the amount of risk that you have and the impact that that level of risk may have during market turbulence. Of course, past performance is no guarantee of future results, but it won’t hurt to see how well or bad your portfolio has done under a wide range of historical situations. Then, adjust your allocations to your desired level of risk and know that when things do sour, that you’re likely to see a decline commensurate with the level of risk you are taking.

 

John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.