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Integrated Wealth Management

Fear and Greed

Market corrections create tremendous fear. They always have and they always will, the greater the correction the greater the fear, this will never change. Quite simply put, this fear is one of the biggest obstacles to successful long-term investing.

Fear causes average investors to make emotional decisions to sell rather than buy assets that have become cheaper. This behavior causes investors to underperform investment markets. Simply staying with a disciplined rebalancing strategy will assure that an investor behaves in a slightly contrarian fashion which in turn will improve chances for better investment performance.

Has Fear Already Created Attractive Opportunities In Europe?

According to one well known European fund manager, David Marcus from the Evermore funds, the answer to this question is yes. In a recent interview, David had this to say about Europe, "There is so much distress right now that investors are panicked, everybody is running every which way. This is one of those markets where logic has departed and emotions are running things, which means that if you can keep your head, people will sell you things at crazy low prices."

Marcus says that behind the headlines, hidden from public view, he’s watching the rebirth of huge sectors of Corporate Europe. As is often the case in investing, the darkest gloom tends to hide the most interesting opportunities. He says, “Someday this period of obsession with Greek debt, bank restructuring and single-digit P/Es may be known as The Great Oversell.”

Staying Diversified

While many investors are selling their international investments, especially those in Europe, we will not. The above anecdotal information from David Marcus leads us to believe that now is not the time to sell foreign investments. The following graph which shows international P/E ratios below their historical averages tells a similar story.

International stock investments could always go lower, and in fact there is a good chance they will. But to sell now would be to follow the crowd of emotional investors that are selling after assets have become cheaper and represent good long-term value.

The GMO 7-year valuation forecasts (that we often refer to) also predict higher 7-year returns for foreign stock investments versus most other investment asset classes. We believe that because our foreign investments were already conservatively allocated in our client portfolios, there is no need to reduce equity exposure at the current time.

Instead we will continue to remain diversified and if the sell off in stocks becomes extreme, we will consider rebalancing our client portfolios and adding slightly to their stock positions.