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BULLS & BEARS Dave Gilreath: Memo to investors: Shake your short-term mindset

September 18, 2006

Most investors in the stock market claim to be oriented to the long term.

They generally put money into stocks for big-picture goals like retirement or college expenses.

But despite what they claim, many individual investors measure their success by the very shortest of time frames.

Nearly all check their progress with their monthly statements.

Many check portfolio values weekly and some even check daily or hourly market prices.

When you don't like what is happening to your account or your mutual fund, at what point do you throw in the towel and change course?

How long do you give your advisers or brokers before you fire them and move to where the grass looks greener?

I had a client who started with me in late 1993 with $180,000 in two retirement accounts.

During the last 13 years, he added less than $10,000, and as of this week his accounts were worth more than $660,000. His growth rate worked out to more than a 10-percent compound annual growth over those 13 years. Not bad for a fairly conservative account.

Admittedly, his account values over the last few years have been erratic, as U.S. growth stocks have struggled and value and foreign stocks have shined.

Apparently, he grew impatient with the recent lack of progress and recently moved his accounts elsewhere.

My guess is his new adviser will diversify his accounts out of U.S equities, or as legendary investor Peter Lynch used to call it, "deworsify."

Cash flows in and out of mutual funds have consistently shown that investors bail out of unpopular styles at their lows and pile in to the strong styles at their highs.

If my former client moves out of U.S. equities, he's not alone. In fact, the lifeboat is packed to the gunwales with individual investors jumping off the U.S. ship.

In the last 12 months, global equity funds have received 87 percent of the inflow into all equity funds.

According to the research firm Trimtabs, "This summer, individuals bailed out of U.S. equity funds at the fastest rate since late 2002."

In case you don't remember, in late 2002, the Dow Jones industrial average bottomed at 7500. That turned out to be the best time to buy U.S. equities in four years, not the time to bail out.

But while regular folks have spent their summer bailing out, longer-term investors have been buying up a storm. Corporations are very long-term investors. The companies they acquire often take many, many months to add to their bottom lines. Between corporate buyouts and buybacks, Trimtabs reports that this summer "corporate America went on the biggest buying spree we have ever seen since we began tracking it in 1995." So what's going to happen to your portfolio value over the next few minutes, days, weeks or months? It doesn't matter. Forget the short-term myopia. The always-wrong individuals are selling big time and the smart-money corporations are buying by the gross. Follow the smart money and buy American.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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