Why Are So Many People Wrong?

After Matt Carr wrote about the American Association of Individual Investors (AAII) sentiment survey, where bullish and bearish sentiment fell, but neutral sentiment spiked, I took a closer look at some of the numbers over the weekend.

And what I found shocked me.

Over the long term, the majority of investors surveyed were dead wrong.

Here’s what I mean.

Since 1987, the weekly AAII sentiment survey had the following average reading:

Bullish: 38.8%

Neutral: 30.7%

Bearish: 30.5%.

In that period, the S&P 500 has gone up 498% – a compound average growth rate of 7%, not including dividends – pretty much in line with historical averages.

Think about that for a minute.

Over a quarter of a century, despite some big moves up and down, stocks performed as they historically always have, averaging about 7% gains per year.

And while stocks went along their usual course higher, at any given time, the majority of investors were, on average, not bullish.

Nearly two-thirds of investors, in fact, expected the market to go down or remain flat.

How is that possible? Have we become a world of glass-half-empty pessimists

The news media certainly doesn’t help. Watch your local news, and it’s all rape, murder and other morbidly fascinating tragedies. National news focuses on war, terrorism and whatever financial crisis is looming or has just occurred.

And of course the financial media needs to scare you in order to keep you hooked so you know what and when to buy and sell.

Jim Cramer wouldn’t be a household name if he told you to buy a few quality stocks or an index fund and hold them for the next 20 years. Heck, I wouldn’t be asked to be on CNBC every week if, when they ask me my opinion on a stock, I said, “instead of buying the stock, just buy a cheap index fund or basket of dividend payers and hold for 20 years.”

But for most investors, that’s precisely what they should do. Alexander Green’s Gone Fishin’ Portfolio is one of the best performing portfolios in the business for a very good reason. He recommends a mix of assets with very low costs that you should hold for years. It’s inexpensive and it works.

And my own 10-11-12 strategy of recommending Perpetual Dividend Raisers and sticking with them over the years not only captures that 7% gain per year, but also delivers double-digit yields and returns on a conservative portfolio within a decade.

It doesn’t make sense to invest scared. Despite the occasional bubble or risky valuations, stocks still go up over the long term.

If you invested in the S&P 500 at the top of the market in October 2007 and simply held on, today you’d have a gain of 21%. That’s not terrible when you consider that we were on the verge of financial Armageddon, suffered through a historic recession and have experienced a lukewarm rebound.

Even after all of that, a long-term investor made money. Not a lot, but they still made money. Their 401(k) was made whole and then some.

If you’re a long-term investor, I hope you won’t be part of the majority that is constantly afraid. That’s no way to live. And it’s no way to make money.

Good investing,

Marc

P.S. No one can predict the direction of the public stock market that most people invest in. That’s why celebrities and Washington insiders, including President Obama, put their money in their own private stock market, where returns predictably dwarf the little guy’s. You canaccess this market, however… if you know how. Marc’s new report on it is available byclicking here.