Related Topics
Investing , Stocks , US Markets
Share This Page         

The Treacherous Psychology of Ramped-Up Investor Expectations

Investors tend to ignore market data that doesn't fit their wishes

by Bob Stokes
Updated: May 05, 2017

There's a sizeable gap between investor expectations and historical market returns. Chalk it up to ramped-up optimism and what psychologists call "information avoidance." Two surveys and one chart are revealing.

 

*********

[Editor's Note: The text version of the story is below.]

You might recall this famous line from the film "A Few Good Men":

"You can't handle the truth!"

Financial markets are an entirely different arena than a military courtroom, but I couldn't help but think of that line after I read an April 28 Wall Street Journal article subtitled:

Investors have a hard time looking the truth square in the face

The article says:

In one recent survey, wealthy individuals said they expect their portfolios to earn a long-run average of 8.5% annually after inflation. With bonds yielding roughly 2.5%, a typical stock-and-bond portfolio would need stocks to grow at 12.5% annually in order to hit that overall 8.5% target. Net of fees and inflation, that would require approximately doubling the 7% annual gain stocks have produced over the long term.

One in six institutional investors, in another survey, projected gains of more than 20% annually on their investments in venture capital -- even though such funds, on average, have underperformed the stock market for much of the 2000s.

It all boils down to runaway optimism, and, as the article notes, what psychologists term "information avoidance." In other words, people often downplay information that conflicts with their wishes.

This same sentiment is shared by public pension fund managers. Our April 2017 Elliott Wave Financial Forecast said:

Public pension funds' unfunded liabilities are up from $292 million in 2007 to $1.9 trillion in late 2016, and they continue to assume unrealistically high rates of return for their portfolios. Bloomberg reports that the reason they do so is that "many cities and states would buckle under the weight of more realistic assumed rates of return." [emphasis added]

Today's optimism extends to other investor groups. Our May Elliott Wave Financial Forecast showed this chart [entire wave labeling available to subscribers] and said:

Investors Take Stock

SentimentTrader.com notes that in nearly 30 years, fewer than 10% of months have seen investors hold 52% more in stocks than in cash: most were during the late 1990s, which led to a decade-long bear market. ... The all-time high spread between stocks and cash for the American Association of Individual Investors (AAII) members is 64% in December 1999, at the end of [a significant advance]. It will be interesting to see if investors challenge this record as the Dow's [wave structure unfolds].

The financial uptrend that started in March 2009 may not end tomorrow, but our read of the market's Elliott wave pattern suggests that we're closer to a major trend change than most investors realize.

Financial Forecast Service | Financial Forecast, Elliott Wave Theorist, Short Term Update

Jump on once-in-a-lifetime opportunities and avoid dangerous pitfalls that no one else sees coming

When the mainstream is calling for permanently calm markets, that's usually when a rude awakening is just around the corner. We can help you prepare for opportunities and side step risks that will surprise most investors.

Financial Forecast Service prepared its subscribers for the 2008-2009 financial crisis, the dramatic volatility in stocks in January 2016 -- and the strong rally that followed.

And we're doing it again. Subscribe now and get complete coverage for the next 3 months AND $237 worth of gifts to help you end 2017 strong and start 2018 off on the right foot.

Your Home "Investment": A New Study Might Surprise You

This Sovereign Wealth Fund "Doubles Down" on Tech -- What It Might Mean

An “Unprestigious” Preview of Debt Deflation

Your “Investing” Brain vs. Your “Shopping” Brain: Guess Which One Wins?

Using Elliott Waves: As Simple As A-B-C

Basic Tenets of the Elliott Wave Principle

FAQ: Is it possible that today's widespread computerized trading including HFT might cause the market to stray from the Wave Principle?

FAQ: Sometimes on your charts there is overlap between waves one and four within wave 5. Doesn't that break a rule?