I’ve told this to my children over the years when they get a little rambunctious. It may also be a good response now for investors whom may be getting a little “rambunctious” with their stock investing. To make this point, we will take a quick look at a classic illustration and provide some brief facts. First, the illustration – which needs no explanation:

As for facts, it is not hard to witness a noticeable change in the attitudes of investors since the presidential election and the ensuing stock market advance. The volume of inflows into stock mutual funds has jumped and the talking heads on cable are fanning the flames. Even Warren Buffett, during a recent interview on CNBC, snubbed bonds and proclaimed that stocks were the only way to go for long-term investors. Do you think that might cause a few investors to get over-excited?

PLEASE UNDERSTAND: We are not trashing stocks or Warren Buffett. We are just making the point that the value of diversification and economically-balanced portfolios that include stocks AND bonds (and other asset classes) does not vanish because of a change of political climate or short-term movements in markets. In fact, the value may only increase due to the risk of making decisions based more upon emotions than reason. Which brings us back to the Cycle above.

FINAL NOTE: As for the Cycle illustration above, it is not to be used to determine where we are currently along the cycle, rather as a reminder that The Cycle of Market Emotions is synonymous with The Cycle of HUMAN Emotions, which is not the basis upon which to make sound investment decisions.

Please let us know if we can help you in any way. You may also find it useful to review our past blog posts and archived quarterly letters.