New Retirees Often Make Poor Decisions

Last week I posted a note discussing the dangers of trusting your instincts in making investment decisions.

Loss aversion, and extrapolating recent market actions into the future, can often lead retirees to make decisions that don't take into account the longer term prospects for any given investments.

Investment professional are no different, by the way. A month ago, interest rates were rising, commodity prices were up, and the stock market had recovered from the poor start in January. The talk among my investment friends was all about boosting allocation to stocks.

Now, a month later, the turmoil in the euro block has smacked the world markets, and the market mood has turned 180 degrees. Investors who shunned bond investments when the Treasury 10 year note was yielding 4% now think that Treasurys yielding 3.35% are a good deal.

Meanwhile, the news from corporate America (and Europe, for that matter) continues to improve. For example, one of my favorite analysts Ken Hoexter from Merrill Lynch posted this note about an analyst meeting yesterday at Union Pacific. Here's an excerpt:

Meeting upbeat...Vols, Pricing, Coal, Op leverage & Buyback
Yesterday, we hosted meetings with Union Pacific's management in Omaha, which had a bullish overtone, as volumes continue to surpass expectations, coal inventories are no longer outsized relative to daily burn levels (first time since 7/06), pure pricing is gaining strength through the year, its leverage could drive its operating ratio into the 60's (mgmt didn't commit, we're just doing the math), and it has launched a $2.4 billion stock buyback (or 32.6 million shares, 6% of total).

Volumes running more than 500 bps ahead of target
For the third quarter in a row, we increased our volume targets intra-quarter, as carloads are currently up 19% vs. our 13% target, according to AAR weekly carload data. We increased our 2Q10 target to 17% from 13% (comps bottomed during 2Q09). Our largest increases are at Industrial (+21% vs. our prior +13% target), Intermodal (+22% vs. +17%), and Coal (+6% vs. +3%). Additionally, management noted it anticipates a peak season for the first time in 3 years.

The longer term prospects for stocks continues to look favorable, despite the recent swoon. Focusing the fundamentals, and the data, rather than on "gut instinct" should serve all of us well.


New Retirees Often Make Poor Decisions

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