Why 'experts' are calling for the bubble to pop and what you should do about it


By Shawn Langlois, MarketWatch

When it comes to financial news, headlines like “Jim Rogers says the next bear market will be ‘the worst in our lifetime’” and “This ‘prophet of doom’ predicts stock market will plunge more than 50%” tend to draw the clicks.

Clearly, doom and gloom sells. But why? Deirdre McCloskey, a professor at the University of Illinois at Chicago, doesn’t exactly have an answer for that.

[post_ads]“For reasons I have never understood, people like to hear that the world is going to hell and become huffy and scornful when some idiotic optimist intrudes on their pleasure,” she once wrote for the Cato Institute. “Yet pessimism has consistently been a poor guide to the modern economic world.”

That’s particularly true these days as bears continue to growl helplessly at a bull market that’s just days away from becoming the longest on record.

So what do the “experts” get out of spouting all the negativity, even as the deck, historically, is stacked against them? To some, they come off as savvy, clear-thinking investors unbowed by popular group-think.

Mark Rzepczynski of the Disciplined Systematic Global Macro Views blog turned to British philosopher John Stuart Mill to sum it up: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”

Mill may have said that back in 1828, but it’s obviously relevant today.

That doesn’t mean, however, skittish investors should ignore the message, according to Rzepczynski. “Read the doomsayers, prepare for the possibility, but don’t be burdened with negativity,” he said, as he offered up this 4-step solution.

1. Discount the negativity. Realize there is a bias, so discount the general level of negative commentary and focus only on the change in negativity.

2. Find the alternative story. For every negative story, there should be a well-defined positive alternative. Find that story and see if it counters the negative. The same can be said for positive stories and finding the negative.
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3. Diversify. Diversification is the only cheap alternative to protect against negative events. Diversification may come in the form of building portfolio with assets that have low correlation or forming barbell portfolios between cash and risky assets.

4. Follow the trend. If there is high subjective uncertainty, follow the market trends that serve as a weighted average of investor opinions. You will be subject to reversals, but trend-following with some form of stop risk management creates option-like payoffs that may serve investors well. This strategy should be tied with diversification.

Meanwhile, the Dow industrials are up triple-digits and the S&P 500 is within spitting distance of a record high.

Oh, but click here to see why the Buffett indicator is signaling “huge downside ahead” for the market.

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Business - U.S. Daily News: Why 'experts' are calling for the bubble to pop and what you should do about it
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Business - U.S. Daily News
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