Wednesday, September 01, 2010

Choosing Data Analysis over Emotion

Recently, I attended a presentation in which the speaker showed about two dozen different graphs and charts that indicated the economy was coming out of recession. Being an engineer, I appreciated the level of rigor that was evident in each analysis. He analysis included treasury spreads, housing starts, housing inventory, non-farm payrolls and many other common used indicators. From an objective point of view, the evidence was compelling that investing in stocks was good idea.

However, having experienced significant investment losses in 2008, many of the attendees were skeptical of the conclusion. On participant asked, " Could it be different this time?" The speaker answered that yes, there was no guarantee they would be right and they could be wrong. However, that would be going against years of data that showed otherwise.

So what's an investor to do? Data or gut?

Generally I like discipline of relying on the data which shows a high probability of a continued economic recovery. That can be difficult when the conclusion is contrary to my gut. However, this time the data agrees with personal perception of how businesses and the economy is doing.

Over the next few months, I plan to significantly increase our investments in the stock market in anticipation of a continued recovery. However, we won't make the entire addition at once, just in case there are still some market declines on the way to recovery :-)

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

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