Outside voices and views for advisers

The dangers of unchecked optimism

There is a growing chorus of those who think the market is overvalued right now

Jan 23, 2014 @ 9:17 am

By Dr. Daniel Crosby

+ Zoom

Roughly two weeks ago we introduced you to the Crosby Irrationality Index, a 0 to 100 gauge of market sentiment constructed from a weighted mix of fundamental and technical indicators.

At last report, we appraised the market to be “highly-optimistic-but-not-quite-downright-manic” and the latest CII sends a similar message. There is a growing chorus of those who think the market is overvalued (I'm a member of said choir) right now that is doing its best to warn people about the dangers of unchecked optimism.

However, these fun-haters are coming head to head with the reality of crowd psychology, which is that many people are just beginning to feel safe again now — after the enormous gains of 2013 have been realized, a run-up in which they likely had no part. It is against this fractured backdrop that I present the latest CII results:

The five strata of sentiment:

• Revulsion - 0 to 19

• Watchfulness - 20 to 39

• Equilibrium - 40 to 59

• Optimism - 60 to 79

• Mania - 80 to 100

Current CII Score: 71.5 (Optimism)

Implied S&P 500 returns:

• One month 0.0221

• One year -2.4733

• Three year -6.489

The CII implied returns cited above should be understood less as specific return predictions and more as broad evidence of the financial head winds we currently face. After all, these numbers are based on historical precedent and we know that history repeats itself until it doesn't. We may not yet be in the throes of market mania, but it's hard to argue that there are many bargains to be had at this point, especially for investors purchasing products that mirror equity benchmarks. At times such as these, it behooves financial advisers to begin to manage the expectations of investors, revisit the fundamental tenets of investment decision-making and encourage prudence.

Your returns made you a hero in 2013, but it's my bet that your skills as a therapist are what will make them love you in 2014.

Dr. Daniel Crosby is a behavioral finance expert who works with organizations to develop products and messaging to maximize positive investment outcomes. Among his current collaborations is "Personal Benchmark", a system of embedded behavioral finance delivered by Brinker Capital.


What do you think?

View comments

Recommended for you

Featured video


How to effectively engage and serve female clients

It is clear building relationships with women is a proven way to grow your business. Heather Ettinger of Fairport Asset Management explains proven segmentation strategies.

Latest news & opinion

Fidelity taps Goldman Sachs to expand lending services through RIAs

Streamlined non-purpose loans use investment portfolios as collateral.

Jay Clayton says SEC, DOL can give market 'clarity' on fiduciary rule

Chief regulator is confident two agencies could reach 'common ground' on an investment advice standard across all accounts.

Sen. Gary Peters brings broker background to work every day on Capitol Hill

Michigan Democrat resists ripping up DOL fiduciary rule but would be open to some changes.

DOL fiduciary rule causing DC-plan record keepers to change business with insurance agents

Principal has communicated that independent agents must change their business models to keep receiving compensation.

DOL fiduciary rule opponents want to push implementation back until 2019

ICI, Chamber of Commerce among groups asking for delay, while Democratic lawmakers call on DOL to keep to its earlier planned schedule of Jan. 1, 2018.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print