The US stock market has been the place to be for the last 3-4 years. So naturally investors are inclined to follow what has been working and abandon their plans. Of course this is one of the reasons the individual investor tends to perform so poorly in the aggregate. Markets are always forward looking while the tendency of investors is to look at what has worked in the past and continue to fight the last battle.
One of the toughest things to explain to clients is that asset classes tend to get more risky the higher in value they become and less risky as they move lower. That future return expectations and dividend yields can increase as market value drops and decrease as price rises.
As the US equity market has basically gone nowhere since Thanksgiving, International and Emerging markets are nearing double digit returns year to date. This likely coincides with investors giving up on their diversified plans and getting overweight domestic equities at precisely the wrong time. Isn’t that how it always goes? This isn’t only true of the average Joe investor either, professional money managers deal with these same behavioral biases as well. It’s not easy and there is no one size fits all solution either. The important thing is to do whatever it takes to keep your perspective in the long term and not in the current market gyrations, which usually amounts to nothing but noise in the big picture.
China’s equity market is the perfect example. Here we have the Shanghai stock market index which has more than doubled over the last 12 months, while the US markets continue to struggle and remain range bound.
The biggest sell off during this run up was of the 10% variety in late January to early February. Last week the Chinese equity market experienced a similar sized correction of 10% and has since found support, at least in the short term. The term “bubble” is being thrown around everywhere these days so it’s no doubt you will hear the term used by some to describe what is going on in China. However unless or until sellers can break the uptrend pattern by creating a correction larger than 10% (size of the last 2 corrections) these warning signs are premature in nature.