Sulking on the Sidelines

Summertime and the living is uneasy -- at least if you're an investor.

"There's no fun out there," says John R. Nofsinger, professor of finance at Washington State University and author of Investment Madness: How Psychology Affects Your Investing ... and What to Do about It. "Everything has been down to kind of flat."

It's fun and excitement that draws most individual investors into the stock market beyond pumping money into their 401(k)s -- even though the current seesawing period might well be an excellent time to invest, according to financial experts.

Nofsinger says this summer ennui reminds him of an old trader's saying, "Never short a dull market."

Dull, dull indeed. Returns for the major market indices meander up and then meander down again. The S&P 500, for example, began the year at 1108, jumped higher, slid lower, then higher and lower again and closed last week just 7 points below the year's starting mark.

While 2003 was a banner year for stocks, uncertainty is clouding the future for companies and investors alike: the presidential election, terrorism, hostilities in Iraq, rising oil prices and, of course, the possibility of more interest rate hikes.

Much of the unease came to a head recently when the UBS/Gallup Index of Investor Optimism conducted its quarterly survey.

"All of the attitudes went into the tank the second quarter," says Frank Newport, editor in chief of the Gallup Poll Tuesday Briefing.

Investors tend to feel most optimistic about investing in the market when the market is doing well and vice versa.

Consider the East Coast (the survey is divided regionally), investor sentiment index and the performance of the S&P 500 in the accompanying charts. The sentiment index hit a peak of 165 the first quarter of 2000, just as the great bull market of the 1990s was imploding, and tumbled until it touched 60 in the third quarter of 2001. Then it climbed back to 110 in the first quarter of 2002, only to collapse to 16 in the first quarter of 2003, the year the markets rallied with a terrific performance.

Investor Optimism
Contrarian indicator?

(Are you seeing a contrarian pattern here?)

This year, the index hit 77 the first quarter, then fell to 51, though Newport thought he saw signs of an uptick in June. "It's not hugely robust," he quickly added.

Apparently not, based on the business of people in the business.

Retail investment firms, such as Merrill Lynch ( MER), Charles Schwab ( SCH) and E*Trade ( ET), are reporting listless trading for the second quarter and analysts expect it to continue into the third.

Even at the nation's all-weather investment clubs, no news is bad news. The number of clubs has declined from 37,500 at its peak in 1998 to 21,000 currently, and individual membership in the National Association of Investors has plummeted from 460,000 to 220,000.

"It's pretty much a straight-line decline," says Mark Robertson, senior contributing editor to the group's publication Better Investing.

Robertson notes that the clubs that have stuck it out know how to deal with the ups and downs of the markets as well as the doldrums we're now experiencing.

"When the market seems to be overvalued, they're willing to sell," he says. "And when everyone else is talking about the world coming to an end, they're buying. Our members seem to be accelerating their investing right now."

Professor Nofsinger says that in a way it's good that people are not overly excited about the market. This often gives them false conviction that they need to act immediately.

"Back in the '90s, people thought the greatest risk was not being in the market," he says. "Today people see risk as being in the market."

When we're influenced by good or bad moods, Nofsinger says, we don't always make the optimal choice. "When it is the time nobody wants to invest, that's the time you want to invest," he says.

People should approach investing more rationally. They should diversify their investments and every year they should rebalance by selling off investments that have done well and using that money to buy more of those that haven't done so well: "That's a buy-low, sell-high kind of strategy."

He recommends having a long-term investment map and using your investments to help you get where you want to go. When the investments you've committed to buying are a little cheap, buy more.

"You get a bigger pop," he says. "Little dips in the market you should view as an opportunity."

Bedda J. Emous, CFP, of Fiduciary Solutions in North Andover, Mass., notes that how well you're doing in the market depends on when you started investing. If it was at the beginning of 2003, you probably feel you are doing all right. If you just started, you're treading water. If you were near the peak of four years ago, then you're very likely still under water.

"If you look at the markets' progress over the decades, it's a jagged line upward."

She takes a long-term, diversified approach, not looking to hit any home runs. Except for 2000 and 2001, she says, she's had just one negative quarter a year and only a few down years in her 30-year career.

She views investing as a preservation strategy: "You want to make money ahead of inflation and taxes. If you're not invested, you can guarantee you will not do well."

Amid the doom and gloom, the squeeze and unease and the simple doldrums, some seeds of hope and optimism were evident.

If you feel the market is uncertain now, she says, it helps to keep things in perspective by talking to a 92-year-old who's lived through the Depression and World War II. "Most everything is just sweating the small stuff," she says.

Every period of time seems like an uncertain time, says Meir Statman, professor of finance at the Leavey School of Business, Santa Clara University in Santa Clara, Calif. "Only in hindsight does it look certain," he says. "Only later on do people say it was absolutely clear."

People should do with their investments what they do with insurance, he advises. They should have something to protect themselves in bad times. And then they should have something that also might help them get rich someday: "We need security and we need hope."

Before joining, Ann Perry was the personal finance columnist for The San Diego Union-Tribune. She is the author of "The Wise Inheritor: A Guide to Managing, Investing and Enjoying Your Inheritance" (Broadway Books, 2003). She has a B.A. in English and Communications from Stanford University and a master's degree from the Columbia University School of Journalism. She can be reached at has a revenue-sharing relationship with under which it receives a portion of the revenue from Amazon purchases by customers directed there from

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