Investor Psychology and Reasons For Hope in 2009 By Jeffrey Stoffer CFA, CFP At Isnare.com Ezine Articles

2008 saw a lot of stunning, almost apocalyptic events. People ask, "What else could possibly go wrong?" The prevailing view seems to be that the economy will get worse before it gets better. As we look out on the year ahead, it is easy to conclude that there are only storm clouds on the economic horizon. So, what are we to think when people start interpreting bad news as good?

A person I recently had coffee with remarked, "The best news I've heard lately is that the recession started a year ago." Her point was that we might already be at least halfway through the downturn. While it may be a bit early for outright optimism, I see several positives that could benefit investors in the year ahead. These are the incoming Obama administration, the lessons learned from past market catastrophes, and the prevailing negative psychology of investors. The last point refers to the notion that once everyone expects bad news, it can actually be good for the markets.

Though November now seems like a long time ago, I still recall the feelings of hope and elation people had following the election of Barack Obama. His victory felt like the first step into a more promising future while also marking a decisive conclusion to the last few dismal years. Regardless of individual political persuasions, optimism for the future is important. It gives us reason to keep going in the face of difficulty.

The incoming administration will be one of the best prepared in memory and will be quick to introduce legislation. Mr. Obama's economic stimulus package will likely approach one trillion dollars. Sometimes large numbers can lose their significance, but I can tell you, a one with 12 zeros after it is big!

We can also take comfort in the fact that the federal government and central banks have gained insights from the Great Depression and from the painfully slow unwinding of Japan's real estate bubble. Though each of these periods in history has its own unique set of circumstances, two points seem salient. Actions required to adequately address problems of such magnitude should be swift and substantial. Thus far, the actions of the world's central banks and governments indicate that they understand this.

When trying to predict what may happen tomorrow or next week people tend to extrapolate from current circumstances. So, as we experience a bad economy we expect it to continue to be that way. Today the consensus view is that the economy and markets will get worse before they get better. Here is where investor psychology comes into play; once a majority of people believes something to be true, it is only a matter of time until the pendulum of opinion swings back in the other direction.

Think about investing in technology stocks back in the year 2000. Almost everyone believed that technology was going to radically change our lives, so we had to be invested there. The ensuing two years witnessed an almost 80 percent drop in the NASDAQ index. Or, more recently we saw consensus form around the idea that you couldn't lose money investing in real estate. We all know now that is not true.

Financial markets are a reflection of expectations about how things will be. They anticipate changes. At some point stocks will stop going down, and in fact will start to rise even in the face of bad news. Just as we are getting more depressed about increasing unemployment numbers and bankruptcy filings, the markets will be sniffing out the beginning of better times ahead.

Most people are convinced that 2009 will be bad. As the preponderance of investors accept this as truth the pendulum of belief will begin to swing back in the other direction. New information, like improvements in the housing market for example, will hasten the process.

We have an incoming administration that is ready to act boldly, with the benefit of lessons learned from past crises. While the daily headlines may continue to be discouraging, the markets will eventually anticipate better times ahead. There is hope and potential for positive surprises in the year ahead.

Published At: Isnare Free Articles Directory http://www.isnare.com
Permanent Link: http://www.isnare.com/?aid=339179&ca=Finances

Important Notice DISCLAIMER: All information, content, and data in this article are sole opinions and/or findings of the individual user or organization that registered and submitted this article at Isnare.com without any fee. The article is strictly for educational or entertainment purposes only and should not be used in any way, implemented or applied without consultation from a professional. We at Isnare.com do not, in anyway, contribute or include our own findings, facts and opinions in any articles presented in this site. Publishing this article does not constitute Isnare.com's support or sponsorship for this article. Isnare.com is an article publishing service. Please read our Terms of Service for more information.