How Not To Break Your Heart With Your Investments - Wells Fargo
Investing based on emotions has been proven to fail, said Erik Davidson, CIO and Executive Vice President of Well Fargo Private Bank.
“[Following your heart] makes great sense romantically on a day like today, Valentine’s Day, or makes great sense academically or vocationally, but financially, following your heart will betray you every single time,” Davidson told Kitco News.
According to Davidson, research has shown that investor sentiment on stocks is a good contrarian indicator.
“Whether we’re looking at consumer confidence or investor confidence, when spirits are high and we’re bullish, oftentimes the subsequent market returns could be quite poor. And conversely, when we are most despondent, when sentiment is most bearish, subsequent market returns can do quite well,” he said.
Stock markets reached a one-year low in December, 2018, around the same time that the CNN Fear & Greed Index, a measure of investor emotions in the markets based on seven indicators, hit “extreme fear.”
The S&P 500 has since rebounded, climbing 17% since December 24th, 2018.
Davidson noted historical examples of markets inflecting at high low points of investor sentiment, such as the bitcoin euphoria of late 2017, followed by a crash in cryptocurrencies, and extreme bearishness in early 2009 that led to near decade-long bull run in the stock markets.
“Understandably, that’s how so many investors do invest: how do I feel about something. Actually, that’s a general rule, is to listen to your heart really, really carefully, and then do the exact opposite, is probably the best strategy from an investment standpoint,” he said.
On gold, Davidson said that the precious metal is trading within the top range of his price forecast for the year, but there are potential tailwinds.
“There may be a bit of a tailwind in the sense that we do see weakness going forward in the U.S. dollar, and obviously the inverse correlation between the dollar and gold, that could help a little bit, so there may be some more room to run for gold,” Davidson said.
He added that precious metals, overall, play an important role in diversifying a portfolio.
Spot gold last traded at $1,312.40 an ounce, up $6 on the trading day.
Davidson said that a common mistake investors make is not having a clear “direction,” or time horizon on their investments.
“The first question investors need to ask themselves is ‘where do they want to go.’ Nobody walks out to their car and in the morning and says ‘where am I going to drive today?’ Or, nobody goes to the airport and says ‘where should I fly?’ You’ve got to know your destination,” he said.