As market sentiment flip flops, what should we do with our investments?
Boy, doesn't sentiment change fast. A week or so ago, everybody was still enjoying the summer rally. My bullish contacts were polishing their horns, bragging that stocks were still hideously undervalued, and the rally had a long, long way to go.
Then in the middle of this week -- bang! Out come the bears with their big clunking paws, to brusquely sweep them away.
How is a well-balanced investor supposed to react to such massive swings in economic and market opinion?
Sell no buy
As I write, the gloom is rising. In fact, the higher my portfolio has risen in recent weeks, the more murkier the doomsday rhetoric has become.
The credit crunch Cassandras are pointing to the sky and wailing that the global stimulus packages are shortly coming to an end, the banks still aren't lending, unemployment is rising, export markets are flailing, the oil price is rising, and Germany is facing a second credit crunch.
High taxes are heading our way, starting on 1 September, when fuel duty rises 2p a litre, while VAT returns to 17.5% in January, and the 50% income tax band kicks in next April. By now it is so dark, it looks like the sky is falling in.
Yet only a week or two ago everything was gladness and light, and the dwindling band of optimists can still point to a few sunnier stats. Markets are holding their own, house prices are rising, and business leaders are claiming the UK recession is over.
Sounds good to me. So why have the bears suddenly got the upper paw?
Let's get physical
Sir Isaac Newton's third rule of motion states that any force will be met by an equal force acting in the opposite direction.
This certainly helps explain why the bears have left their caves just as the bulls started running. Their glumness is an inevitable reaction to all that cheery gladness, and also helps stop us getting carried away by the hype.
It's scientific, innit?
Seasonally affected sentiment
It might also be the weather. Summer is drawing to a close, and the nation's investors are shivering at the thought of the gloom to come.
Many of the gloomiest commentaries are making the meteorology link explicit, predicting a stormy autumn for global stock markets, with a long winter to follow. October is also coming, and we know what that typically means (clue: it is usually presaged by the word Black).
Sentiment isn't necessarily rational. If you invest according to the weather, you are in trouble.
We're all going to die!
Nobody ever lost their audience by predicting the end of the world. Humans take delight in doomsday scenarios, whether caused by God, man, meteorites, superbugs, plague, nanotechnology or credit default swaps.
The economic doomsayers have lost their audience in recent weeks, and may simply be making a final grab for your attention, before they lose it for good.
Sentiment is also political. Plenty of people are down on Gordon Brown and New Labour (can't think why), and don't want to see the economy recover on his watch. You may not want it to recover either, but remember, you should never play politics with your portfolio.
Paton pending
Sentiment doesn't always reflect what is happening in stock markets, nor does it always influence it.
Despite the recent downward shift in mood, the FTSE 100 is still hovering just below 5000, and even more importantly, I'm still making money. Property company Daejan Estates (LSE: DJAN) is up 25% since I took Maynard Paton's advice and parted with some of my own sweet cash on 31 July. Tesco (LSE: TSCO) and Vodafone (LSE: VOD) are up 6% in the last couple of weeks, plus I've still got dividends to come.
Yet still the gloom is getting to me.
Sentimental Fool
So what's the best thing to do with this sudden burst of negative sentiment? Well, if you agree with Charlie Parker of Citywire, It's Time to Sell.
I have been selling my over-charging unit trusts, after I discovered while researching Funds vs Shares just how much their annual charges will cost me over the next 20 years.
And I have decided to delay reinvesting the new money for a month or two, because the bears are beginning to get to me. So that is another tiny scrap of sentiment to add to your collection.
Trust your own instincts, not other people's
You shouldn't ignore sentiment, but you shouldn't be unduly swayed by it either. Otherwise you will end up selling your portfolio one minute, then buying it back the next.
David Kuo likes to end his Money Talk podcasts on a quote. Today, I'm going to end on a home furnishings analogy -- sentiment is like wallpaper. It's all around you, but you don't want to waste too much time gazing at it.
And in any case, it could all change next week.
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