Markets: Be Ready for Oedipus Negative in January
As you may know, there is an entire school of thought devoted to the irregularities and inefficiencies in the market known as behavioral finance. It's within this framework that I offer up the two charts below suggesting a striking degree of similarity between them.
Source: Facset, Standard & Poors, JP Morgan, Gary Goldberg Financial Services
The top one is Rubin's vase, named after the famous Danish psychologist Edgar Rubin. Looked at one way, it's a vase, looked at another, it's two faces. In the vernacular, this is known as an ambiguous or bi-stable form.
The chart below Rubin's vase, developed by my firm, shows the emotional well-being of investors correlated to market returns. The brown bars represent the S&P's annual return, the blue dots represent investors' emotional well-being, and the little red dots show the low point of the market in any given year. Note every year the market went into the red at some point. Also note that 25 of 32 years the market return was positive.
OK, now how is it that Rubin's vase and the chart immediately below are very similar, if not exactly alike?
Give up? OK, here's how. At first glance, the chart illustrates the very simple point that when markets are up, we feel good about them and our investments. But keep looking and another very important idea will begin to emerge: The greatest opportunities for gains come at the points where we feel negative about the markets.
Specifically, if you could get your courage up about the time you felt worst about the markets in 2008, investing in stocks offers some 60 points of upside. It you felt pretty bad about the state of affairs after the dotcom crash in 2000, that was the time to get back in. If you were a real soothsayer, you felt your worst in 2002, when markets were off by some 25%, to be rewarded the following year, when markets returned about 26% for a spread of nearly 50 points. Even if you hit your emotional bottom a little early, say in 2001, you did pretty well in the rebound two years later.
I'm not advocating market timing, which is correctly dubbed one of the world's most difficult feats. I am suggesting that if you are invested in the market, and keep some powder on the side, history shows the time to use it is when things look their worst.