Bad Reasons For Avoiding Stocks

There is a broad group of individual investors who are completely out of stocks or significantly under-invested. Many were paralyzed by fear in the time after 2008.They have still not returned to investments in stocks.

This is a natural and normal reaction to risk. People fear losses more than they crave gains. This natural human trait causes most investors to do exactly the wrong thing at the wrong time!

There are multiple sources of fear, but the current theme is that it is too late for this year. If you have not been invested, you have missed the rally for three reasons:

1. The market has already made most of its gains for the year, getting close to the targets of the most bullish of prognosticators;
2. The move has been too far and too fast;
3. The time of seasonal weakness is upon us.

Let us focus on the first of these reasons – the price target.

Why We Need Moving Targets

Here is an idea that can liberate investors:

Ignore calendar year market forecasts!

If you are looking for an investment edge, here it is. Most people analyze portfolios based upon the calendar. World events march to a different drummer!

This year is a great example. The annual forecasts were done at a point when everyone was worried about the fiscal cliff, a downgrade of US debt, an imminent recession, and a hard landing for China. When this did not happen, (an eleventh hour result that I predicted), the market rallied about 6%.

Suppose that you missed that rally. Should you pretend that the facts did not change? Should you remain anchored to your December, 2012 forecast?

Or should you adjust your thinking to reflect new evidence? Just suppose that the fiscal cliff issues had been resolved in November, 2012. We would have started 2013 from a higher level.

My Method
I have a personal method that has worked well for more than a decade: I use a rolling twelve-month forecast. I do this for individual stocks and also for the market. I refuse to be chained to the calendar.

When the underlying data change, so does my price target. The calendar does not matter. My thinking is flexible, taking what the market is offering.

Some Agreement from The Street
I am surprised and pleased to see that some top analysts are recognizing the need for more frequent reviews of their price targets. Instead of going with the knee-jerk reaction, please give some careful attention to first rate web site.

Some current favorites from assorted sectors are AFL, CAT, and JPM.

I will try to elaborate further on this theme, but this installment is timely.

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Written By: Jeff Miller