Now May Be the Time to Listen to the Bears

This article is published with permission from InvestmentU.com.

Last week I was in Las Vegas speaking at FreedomFest, a libertarian conference devoted to politics, investing, art, science, history and health.

This is one of my favorite conferences, put on each year by my good friend and Investment U colleague Dr. Mark Skousen. However, the speakers here have a reputation for being famously pessimistic about the future, mostly because libertarians favor fiscal responsibility, limited government, and constitutionalism—and we haven't experienced an abundance of those things lately.

Although I'm optimistic about stocks, it's not a bad time to listen to a few gloom-and-doomers right now.

Investors generally have a bad habit of being too optimistic when the market is high and too pessimistic when share prices are low. Mutual fund cash flow figures show that mom-and-pop investors are only just moving into stocks after being scared out of their wits during the recent financial crisis. This doesn't mean the end is nigh, of course. But it is a warning flag.

As John Templeton famously said, "Bull markets are born on pessimism, grow on skepticism, peak on optimism and die on euphoria." We haven't reached euphoria yet, but we're well into optimism now.

Also, this rally is now 5-and-a-half years old. The bull market of the ’90s lasted considerably longer, but it's not a bad time to look at your portfolio and make sure you're comfortable with how much money you have in stocks. If we had a nasty downturn again, could you live with that? Have you made sure to diversify outside the stock market and run trailing stops behind all your individual stock positions?

Remember, the best time to prepare for a bear market is during a bull market, just as the best time to prepare for the next bull market is during a bear market.

Let's not panic

Don't take the pessimists too seriously when you hear them out, of course. After all, they don't know what the market is going to do next, the same as everyone else. Many, in fact, have simply discovered that they can make good money scaring the pants off people. And they do.

Others are bearish because they are unhappy with the growing federal budget deficit and our huge unfunded liabilities for Social Security, Medicare, Medicaid, and the prescription drug benefit. Who can blame them?

However, the annual budget deficit as a percentage of GDP is coming down. It will still be too high this year at nearly $400 billion. But at least we're below the $1 trillion-plus deficits of the last few years.

As for the unfunded liabilities, that is money that hasn't been spent and, in many cases, won't be. Entitlements will have to be reformed, but they can't be until November's election changes the political alignment in Washington.

What matters

In the meantime, barring a national emergency, business trumps politics. Think about it. If you were a businessman making a bundle selling a hot new product and were having trouble keeping up with orders, finding enough manufacturing facilities and distribution centers, and hiring enough qualified people, would you really liquidate your business because the federal budget deficit is too large? That doesn't make sense. But that's exactly what these folks are recommending when they tell you to sell your stocks.

(Yet, you'll notice they aren't selling their business—the profitable one of issuing bearish investment commentary.)

Yes, politics trumped business in the Weimar Republic, and still does today in certain places (from Argentina to Iraq to Ukraine). But, under ordinary circumstances, billions of customers are out satisfying their economic wants and needs every day and businesses thrive by serving them. You want a piece of that action.

So give the scaremongers a hearing. Just don't make the mistake of believing them.

Alexander Green is the chief investment strategist at InvestmentU.com. See more articles by Alexander here.

The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.