Are Individual Investors Wrong Most of the Time?

We investors, that is, are almost always wrong collectively about which direction the stock market will go.

Here’s the holiday looking colorful chart (compliments of AAII) to support my points below:

investors wrong most of the time chart

The AAII (American Association of Individual Investors, that’s most of us reading this:) reported that those expecting a rise in stocks over the next 6 months fell to the lowest level since 1992, at 15.8%.

The stock market, or SPY, generally has experienced high returns from one month to two years after this signal except for in January 2008, according to Seeking Alpha quoting technical strategist Stephen Suttmeier.

It’s interesting, and even somewhat ironic that what we investors think stocks will do is so reliably wrong that what we expect can actually be used to predict stock market direction.

How crazy is that? I find it pretty humbling myself, and if I must confess, also spot on.

What are the takeaways I want to share with you from this insight?

  1. We don’t know for sure if stocks will go up or down, we just know for certain they will do both, often monumentally.
  2. Defining how much risk you’re willing to accept from stocks or any other investment is the first step to investing so you can invest from that place.
  3. Indicators such as the one above provide probabilities. I always like to remind coaching clients that all we can do is base our investment decisions on probabilities; the problem with probabilities is there are always exceptions, just like in January 2008 in the data above.

Therein lies the risk, those darn exceptions can wreck the best investments plans.

How do I personally invest (and live in peace:) around this uncertainty?


Here’s what I do:

  1. I list all our assets on a spreadsheet and total our net worth, a little old fashioned and nerdy, yes, but very effective. Entering the data forces me to focus on the math vs. an app with beautiful pie charts linking to our investment accounts; then I’m ever so tempted to play with the numbers, and there’s the magic of intentional investing.
  2. Next, seeing the numbers, I define how much of a net worth drop I’m okay with from both an emotional and a financial perspective.
  3. Here’s the fun part; making money from our money. Admittedly, building wealth passively is pretty awesome. So, next, I brainstorm how to truly optimize our capital, and hold myself accountable for the savings I’m not optimizing outside our “emergency fund”.

This leads me to ask the question: “How much return can we probably get while being at peace with our investments?”

That’s really the $1,000,000 question.

Now, I’m much more strategic with our stocks and bonds than I am with our home and our rental properties even though, probably like you, real estate makes up a nice chunk of our net worth.

Yet our home is our home, and our rental properties pay us income every month while increasing in value most years.

Plus, real estate transactions are very expensive when compared to free ETF commissions, and also a lot of effort, so I tend to delay them.

So, for our core portfolio, I hold assets besides stocks and bonds as warranted to cover us for a variety of economic and financial situations; unpleasant things like high inflation and bear markets, as well as delightful things like bull markets and insanely rising real estate prices.

But, like most investors, I don’t buy and hold these investments no matter what. That just doesn’t make sense to me after investing for over four decades and considering economic cycles that have repeated themselves over hundreds of years.

economic and stock market cycles

Instead, I rotate into any of these investments based on which type of investment, AKA asset class, will probably do better over the few months or years based on various factors.

Thank goodness this saves me from having to be certain about which way the stock market is moving since no one knows for sure.

And it allows me to be at peace while optimizing our investment capital.

Bingo. It works for me.

The information on this website is for education only and is not to be construed as personal financial advice.