ARE THE MARKETS RATIONAL…OR IRRATIONAL

The answer, to me of course, is YES! I always like to speak of the Markets in terms of plurals; because, I believe that there are Markets within Markets. For instance, the Dow Jones Industrials might be rising and the Russell 3000 (smaller companies) declining, in Times of Uncertainty, when people are pursuing a so-called “Flight to Quality”. Others might be making a Sector Rotation, from let’s say Financials to Industrials, if they believe that that move might be beneficial. Similarly, shifts from Stocks to Bonds, or vice versa, might be appropriate.

Sometimes, people view economic news, or actions by the Federal Reserve, differently. To me, it is somewhat like when you are approaching a bridge that is stuck in the upright position. Should you wait, or turn-back and take another route? Who knows for sure; but, you do what you think best, at the time.  You cannot digest information that you do not have.

For instance, let’s assume that the FED took unexpected action to Stimulate the Economy. Two rationale people might react differently. The one might invest more aggressively, to take advantage of the FED’s Actions, while the other might reduce their portfolio since, they believe, the Economy is in worse shape than they had thought.

Now, so far, we have assumed that investors have reasons, although based on differing opinions, behind their investment decisions. But, you surely know people who act on “hot tips”, buy what has been around forever or because some personality is involved in the company. Now, occasionally, these approaches might work out. More often however, they are a sure way to lose money. Just remember: brokers are paid to push their products, National Cash Registers and Polaroids can only be seen at the Smithsonian and personalities get paid for their apparent involvement.

I suggest that you include these rules in your investment decisions: do your homework; consult your Financial Advisor and ask lots of questions; don’t be swayed by someone else’s decisions (without following the rules); focus on the future–not past performance; ask yourself if the projections truly make sense and don’t be afraid to sleep on a decision. Lastly, if it sounds too good to be true–it probably is!

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