Average investors have a “permanent buy-side bias,” said John O’Donnell, chief knowledge officer of Online Trading Academy.
Sounds serious, if not terminal — but it can be overcome.
“Part of the challenge is to bridge the gap between the public’s perception and reality,” he said.
People “always look to buy something of good value — but that’s generated the dangerous perception that buy and hold works.”
But stocks, real estate and assets are “perpetually fluctuating” in value. American families and businesses — globally and nationally — are ushering in the “new frugal.”
“Americans are going to Starbucks less frequently (my editor would say that a certain banking and finance writer apparently didn’t get that memo), they’re traveling less frequently — and, quite frankly, they’re saving money,” he said. “It’s a paradigm shift for savings to be up to 6 percent.”
The global economy is in a “period of deleveraging — a purge cycle that may take 10 years to run its course,” O’Donnell said. “You can’t spend your way to wealth, despite all the stimulus packages from Washington — you have to earn it.”
And Americans are “not in the mood” to spend. So, with the “slowing of the economy” — and, in recent history, personal consumption has accounted for 72 percent of gross domestic product, he said, the nation would have to increase spending, which isn’t too likely.
(Even yours truly has — gasp — eschewed stiletto and hiking boot shopping of late.)
“I think we’ll return to the long-term average of consumption at 64 percent of GDP,” he said, “especially since it’s difficult to name a sector in our economy that’s growing. As investors and traders, we have to transition to the new normal. No one is exempt from this transition — no company, no family.”
Here are four steps toward an easier transition.
The first is to have a “proper” set of skills, through education and awareness, which also can mean learning a new set of skills — aka going back to school — he said, especially for those who have been laid off.
Secondly, “you have to have a new attitude.”
The old attitude was buy and hold — while expecting an asset to appreciate in value.
“You ought to think of your home as a nest — a shelter for your family — not as an investment,” O’Donnell said. “People were euphoric, irrational, and used their homes as a speculation vehicle. Those days are over. We’re not going back to the era of if-you-can-fog-a-mirror and lie about your income you too can buy an overvalued home you can’t afford.”
And transition will be vastly easier if one “loses the attitude” of living beyond one’s means.
Thirdly, investors need the right set of tools, which O’Donnell said includes an online brokerage account, “giving up your relationship with your old normal stock broker on the phone,” and becoming a self-directed investor.
“Take responsibility for your own financial affairs, and take those decisions away from a broker and learn to make your own decisions,” he said.
And, finally, investors need the “right support mechanism. You don’t need to be isolated and alone during this transition — you need a community of support,” he said, whether that’s an online or brick-and-mortar community.
Investors should become “market-driven traders.”
“Recognize that markets of all kinds — oil, stock, real estate — are always fluctuating and volatile,” O’Donnell said. “There’s no such thing as price stability — only price volatility. As a market-driven trader, you are always aware of whether the market’s going up or down. There is wonderful opportunity in price changes — you can make money in markets that go up in price, and in markets that go down.”
And clamor might equal glamour, but it doesn’t necessarily equate to sage advice.
So, stop listening to all the hoopla.
“The noise is in the media — “ O’Donnell said, “the CNBCs of this world and the traditional financial media,” whom he calls “pseudo experts.”
Investors are not receiving fundamental analysis or technical analysis if they are “just listening to the noise.”
Investors need to be “properly coached” about how to mine fundamental and technical analyses to make the two most important decisions: “When to buy, and when to sell.”
“You need serious forethought — not wishing/hoping the price will go up — and you need to have a plan,” O’Donnell said.
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.