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AAII Sentiment Survey

Our Sentiment Survey was the subject of a Wall Street Journal article last month. The article discussed the survey’s popularity, its limitations (we do not conduct a random sampling) and the correlations between the survey and market turning points.

One of the statistics highlighted in the article was the spread between bullish and bearish sentiment (aka the bull-bear spread). Research firm Birinyi Associates calculates that whenever the bull-bear spread exceeds +30 points, the S&P 500 has tended to fall over the next six months.

Ironically, on the same day the article was published (December 9, 2010), the bull-bear spread reached +30.5 percentage points (53.1% bullish and 22.6% bearish).

Though this sounded bearish, it should not have been used as the sole reason to buy or sell. You should never buy or sell stocks based on any single sentiment indicator, or solely on one fundamental or technical indicator. Rather, look at a broad array of factors, including your portfolio allocation. Ideally, you want several indicators to provide the same signal.

For example, consider shifts in the economic data, prevailing valuations, business conditions and revisions to earnings estimates. You can overlay this with technical analysis and the results from investor sentiment surveys. Alternatively, you can use charts and sentiment surveys as an impetus to conduct further research. Charts and surveys can often tip you off to something you may have overlooked in the economic and fundamental data.

This is particularly the case when using our survey to gauge market direction based on levels of optimism and pessimism. Extraordinarily high bullish and bearish readings in the AAII Sentiment Survey have been correlated with market reversals. (Extraordinarily high bullish readings have preceded market corrections and extraordinarily high bearish readings have preceded market rallies.)

We republished Wayne Thorp’s article on how the AAII Sentiment Survey can be used to determine when a market reversal may be forthcoming on the Sentiment Survey page (www.aaii.com/sentimentsurvey). Though written in 2004, the article’s emphasis on paying attention to extreme readings in bullish and bearish sentiment continues to hold true.

Sources: The Wall Street Journal, “Investor Survey Says: Bet Oppositely,” December 9, 2010; AAII Investor Update, December 9, 2010.

From the Bookshelf

The often conflicting desires of investors are tackled by Meir Statman in “What Investors Really Want” (McGraw-Hill, 2011). According to Statman, investors seek out a combination of three types of benefits: utilitarian, expressive and emotional. Statman then proceeds to explain that, while seeking expressive and emotional benefits from investing is a human trait, doing so can also lead to weaker performance.

One of the examples Statman cites is the frequency of trading. Statman references studies that show that active trading results in lower returns, the opposite of what active traders set out to do. The reason, he explains, is that cognitive errors and emotions mislead investors.

The upside of this book is its reliance on rational thought over emotion. The author encourages investors to avoid the temptation to do what seems popular at the time, think through each investment decision and determine if tracking an index would be a more profitable strategy.

The third edition of “The Complete Idiot’s Guide to Social Security and Medicare,” by Lita Epstein (Alpha Books, 2010) provides a basic overview that is helpful both for those who are about to retire and those who are retired. Like many titles in the Complete Idiot’s Guide line, this book focuses on the key components of both programs and provides practical suggestions.

There are a few chapters about income, budgeting and Social Security. One of the points Epstein makes is the importance of finding a balance between the dollars you need from your portfolio to live and the objective of ensuring you don’t outlive your retirement savings. This is why it is necessary to continue maintaining an allocation to stocks even after you have retired and begun to withdraw money from your portfolio.

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In terms of how much to withdraw, Epstein suggests 4% of retirement savings on an annual basis. The actual amount, however, will depend on both your required minimum distribution RMD and income provided from Social Security, pensions and other sources.


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