Relying on Process During a Good Year for My Portfolio

• The Role of Luck and Skill in Investing – Strategist Michael Mauboussin provided suggestions on improving the investment process given the role luck plays in realized returns in this 2013 AAII Journal article.
  
• Best Practices for Portfolio Rebalancing – My process of periodic rebalancing is based on this study by Vanguard.
  

It may be Halloween, but there is nothing ghoulish about our survey this week as the largest number of individual investors described their outlook for stocks as “neutral” in the latest AAII Sentiment Survey. Additionally, optimism declined while pessimism slightly increased.

Bullish sentiment, expectations that stock prices will rise over the next six months, pulled back by 1.6 percentage points to 34.0%. Optimism is below its historical average of 38.0% for the 36th time this year and the 24th time in 25 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 1.5 percentage points to 37.6%. Neutral sentiment is above its historical average of 31.5% for the 23rd time in 24 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, edged up 0.2 percentage points to 28.4%. Pessimism is below its historical average of 30.5% on consecutive weeks for the first time since July 10, 2019, and July 17, 2019.

At current levels, all three indicators are within their historical averages.

Many individual investors have been monitoring trade negotiations, particularly between the U.S. and China. Also having an influence on sentiment are Washington politics, geopolitics, valuations, corporate earnings, economic growth, monetary policy and interest rates.

Most AAII members voted in this week’s survey before yesterday’s announcement of a third rate cut by the Federal Open Market Committee (FOMC). Our survey period runs from Thursday through Wednesday each week. Reminders to take the survey are emailed to a rotating group of AAII members every Monday.

This week’s special question asked AAII members how they perceive the current state of the housing market. The results were mixed and demonstrate how drastically different the housing market is in different parts of the country. About 27% of respondents state that the housing market is currently overvalued, particularly in areas like the San Francisco Bay area, Seattle and Denver. On the other hand, a similar proportion of respondents (25%) say that the market is stable from both a buyer and seller point of view. Current low interest rates were named as a driving factor for expected growth by 19% of respondents, while 12% say that they believe the housing market is beginning to slow down. Finally, 16% believe that there is an inadequate supply of affordable housing for the middle class in their area.

Here is a sampling of the responses: 

• “American businesses are strong, and unemployment is low. We have more upside potential. Prices will move up in the housing market, as long as mortgage interest rates are still low.”
• “Out of sync with demand. Lots of high end, but not much middle-to-low end. This may change after the fire season in California.”
• “Neutral in Florida. No change in the past 10 years.”
• “Housing sector is getting weaker. I see more promotions and homes sitting on the market longer. It may even be a bit over-built in the Pacific Northwest region.”
• “In my area, the market is overpriced because of a lack of homes for sale.”