Markets Vs Economy – The Great Disconnect

Last week, the markets hit new “all-time” highs as Greece caved into the demands of the Eurozone, at least for now, in order to secure funding for another four months. The relief that the latest Eurozone crisis has been resolved sent money flowing into equity markets as investors remain “afraid to miss out” on rising asset prices. The general consensus of analysts and economists is that the rise in capital markets is clearly a sign of economic strength which makes equities the “only game in town” as long as Central Banks stand at the fore.

However, I have a few points which are a bit more pragmatic.

First, while it is true that the markets have risen to “all-time highs,” on an inflation adjusted basis, this is not the case for most investors. As I have written previously in  Why You Can Never Beat The Index I stated that:

“The sad commentary is that investors continually do the wrong things emotionally by watching benchmark indexes. However, what they fail to understand is that there are many factors that affect a ‘market capitalization weighted index’ far differently than a ‘dollar invested portfolio.’”

These misunderstandings lead to emotional decisions to buy and sell at the wrong times; jump from one investment strategy to another as well one advisor to the next. While these actions are great for Wall Street, as money in motion creates fees and commissions, it does little to solve the bulk of the problem with investor’s portfolios which is simply emotional mistakes based on unrealistic expectations.  

The single biggest mistake that investors make is the fallacy of chasing a benchmark index (i.e. the S&P 500) thinking that it is something they must beat. But why wouldn’t they? This is what they are told day in and out by the media. It is the mantra that has been drilled into all of us by Wall Street over the last 30 years. However, what we fail to understand is that this is for Wall Street’s benefit and not our own.”

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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