Rethink what you think

You Might Want to Rethink What You Think
- Economists Don't Share Consumer Pessimism

It is human nature to believe that things will always be the way they are today. If it’s raining, it will keep raining; if it’s sunny, it will remain so.

Don’t believe me? Think back to five years ago when real estate prices were rising rapidly. Betcha thought prices would continue to rise. And in March 2009, after stocks had fallen sharply for more than a year, you probably thought prices would keep falling.

Our natural tendencies have again been revealed, this time in a survey by AXA Equitable Life Insurance Company. Nearly one in four consumers believes the economy will continue to be volatile with no clear pattern of improvement. Yet just 12% of economists surveyed agree with the statement. In other words, consumers are twice as negative as the experts.

It’s easy to see why there’s such a disconnect. After all, the last few months have witnessed significant daily market fluctuations, a phenomenon the media have highlighted relentlessly. This has been going on for so long that it’s hard to remember that the market doesn’t usually behave this way.

But economists don’t focus on the market’s day-to-day machinations. Instead, they focus on macroeconomic trends, and they understand that short-term patterns — even those lasting for months — don’t last forever.

But consumers lack the training and discipline that economists have. Small wonder then that 34% of consumers believe unemployment will continue to rise while only 6% of economists agree. (Economists know that the unemployment rate is a better indicator of where the economy has been than of where it is going. They know that stock prices anticipate recovery, while job growth must wait for that recovery to be under way.)

In other words, people who believe that unemployment will continue to rise merely because it has been rising are making the same error as those who believe it will rain merely because it has been raining. Those folks fail to notice that the sun is beginning to shine. Economists understand this. Many consumers don’t.

Because of their faulty thinking, a staggering 85% of Americans think that products that protect principal are the most important, the survey found, even though most of those people are in the wealth accumulation phase of their lives and need the returns of the stock market to help them accumulate enough money for retirement. No wonder only 67% of economists agree with them.

The good news is that not all consumers are making such mental errors. Those who have the assistance of professional financial advisors are more confident and reported better investment results during the past two years than those who don’t have an advisor, the survey found.

So, the choice is yours. You can look at life through a rear-view mirror without anyone’s help, or you can retain the services of a financial advisor who can help you look forward instead of backward.