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Investors Seem Bipolar But Are Probably Just Smart

By Raul Elizalde

NEW YORK (AdviceIQ) -- Here's a paradox: Folks are not optimistic about the new year's investment prospects, but still want to invest more. That sounds like bipolar disorder, when it comes to investing at least, has swept the public.

A survey by The Associated Press finds that most Americans think the stock market will not go up this year. About 40% believe stocks will be just about where they are now at the end of 2014, and almost another 40% predict it will go down. While very few think it will crash, the percentage of bulls is a dismal 14%.

We certainly don't disagree on the downbeat forecast. Back in late October we published a newsletter saying basically the same thing (Don't expect a bull market in 2014). Bullish sentiment ran high at the time, and the fact that popular thinking changed so quickly to align with ours is somewhat unsettling. Crowds tend to be wrong. But the AP poll had other questions that probed deeper into people's thoughts.

That's where the paradox comes in. While almost 80% say they didn't think market will go up, about 77% plan to invest as much, or more heavily, in the coming year. Only 22% plan to pull back.

It is easy to dismiss this blatant contradiction as another proof of how irrational people truly are. But these results may also show that people are wiser than these answers reveal.

The flat-to-down prognosis for 2014 suggests that they intuitively understand that stocks are in uncharted territory. As we showed in our newsletter, stocks had never before gone up 10 out of 11 consecutive years, as they did in the 2003-13 period (2008, of course, was the exception). Expecting that this would also be a positive year is the same as expecting an outlier event even less likely than last year's unprecedented gain.

But while unlikely, a positive 2014 is not impossible. The U.S. economy is undoubtedly picking up, growing at a 3.6% annual pace in the third quarter. There are encouraging signs that Europe is finally leaving behind the chronic crisis that plagued it for years. These are two powerful conditions that can propel the market higher still, even if central banks start to pull back on monetary stimulus.

So crowds are mad, but that doesn't mean they are stupid. The contradictory results of the AP survey may actually suggest that they actually understand their limitations: Their gut tells them the market may fall, but their heads tells them that they are often wrong. What to do, then?

The inevitable answer seems to be: Bite the bullet and leave your chips on the table. Which is also what the majority of Wall Street strategists seem to be saying.

To us, the results of this poll mean that uncertainty is running high. The safest bet, therefore, is that both the general public and the professionals will change their minds often in the coming months. The conclusion is that volatility, long subdued, may raise its head again in 2014.

-- By Raul Elizalde, president and chief investment officer of Path Financial LLC Investment Management in Sarasota, Fla., where he writes the e-letter Straight Talk.

AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

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AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

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