Learning from the Crowd…

2013 is here and equity indices are in the midst of a phenomenal multi-year bull run with the Dow Jones Industrial Average on the verge of testing all time highs. If we choose to believe the media, the economy has turned the corner, housing has bottomed, employment is improving, the European situation is no longer a worry, inflation is not going to be a concern, and we should expect global markets to continue to prosper moving forward.  Whatever your opinion, the magic of the internet will bring you scores of articles, charts, and ‘expert’ analysis to support your position.


This raises an interesting question:


To what extent does the average investor allow outside opinions to cloud their investment judgment?

*Source: Bigcharts.com


There is much to be learned from historical investing mistakes, whether your own or those of the masses.  In times of extended bullishness it is common for individual investor portfolios to become overweight equities. Investors then tend to adopt a false sense of security, becoming complacent as volatility decreases and indexes move higher.   “The crowd is always wrong” is an old Wall Street adage dating back to at least 1915. This line of thought is the basis for contrarian investing and one of the central issues in behavioral finance.  Behavioral finance combines behavioral and psychological theories with economics and finance in an effort to explain why market participants make irrational financial decisions and the effect on prices and returns.  The now famous dot-com bubble is likely the most recognizable example of this, where herd mentality kept investors pouring their capital into tech stocks in hopes of enormous never-ending returns.  Numerous other examples of this type of behavior exist throughout history with everything from tulips to housing markets.  Most of us have been involved, to some extent, at one time or another.


These periods often prove to be a prudent time to become proactive in protecting your recent longer term gains. This can be achieved in a number of ways, be it through reallocation, diversification, or finding new opportunities that may offer comparable returns.  Over the last several years, managed futures have become a viable option for individuals seeking alternatives to the traditional asset classes. When blended with traditional portfolios, managed futures can offer diversification, reduce portfolio volatility, enhance overall return potential, and provide protection during negative equity market cycles. (*past performance is not indicative of future results).




Additionally, many managed futures programs have little to no correlation to the traditional asset classes. Couple this with their potential to generate profits in both rising and falling markets and you will find that managed futures funds have outperformed traditional asset classes during periods of adverse conditions for equities and bonds (*past performance is not always indicative of future results).



With the help of technology, today’s investor is arguably more sophisticated than at any time before – able to access tools and information that were previously only available to professionals. Will these tools, information and sophistication keep most from repeating the mistakes of the past?   Regardless of your outlook moving forward, perhaps it is a good time to review your current portfolio with an emphasis on identifying areas of weakness.  What you do when you find them is up to you.


Craig Maccagno

Southeast Regional Manager

Disclaimer: Please use the above material strictly for educational purposes. Past performance is not indicative of future results. Futures trading involves substantial risk of loss.  By no means is this newsletter offering any investment advice or suggesting to make any trade recommendations. Please consult an aiSource advisor prior to opening any managed futures accounts.