Sonders Envisions the Recovery, Warns about Emotional Investing

In the latest installment of Forbes’ Intelligent Investing, Charles Schwab Chief Investment Strategist Liz Ann Sonders talks about the state of the credit markets and economy, the impact of emotion on investors, and the futility of trying to pick the tops and bottoms of markets.

“I do think what we’re going to see, and we may be starting to see it right now, is that production pop,” Sonders said of the economy. “That coiled spring, that may, it’s going to give probably, at least for a time, a V-shaped impression. And may pull some people who have been otherwise, rightly, pessimistic about the economy, into that camp that maybe we’re okay.” Sonders says she thinks the recession may actually be over, but she’s concerned that the recovery won’t be a “V”, but instead a “W”. “I think that there are a number of things you could put on a list of, ‘What could cause us to roll back over again?'” she said. “Akin to what we saw in the early ’80s.”

A brief look at some of the other topics Sonders addressed in the wide-ranging interview:

Discipline: “I think there’s not enough emphasis on that whole first part of the process, which is figuring out who you are as an investor. Looking not only at the basics of time horizon, but what are my past experiences? Has my emotional fortitude, or lack thereof, caused me to make grave errors which are so often what sort of teaches us lessons? … And I think probably too large a percentage of people actually act on [what they see on television]. And that’s speculating. And that’s not something that we do or we think most investors should do.”

The Importance of Asset Allocation: “You need to let your portfolio tell you when it’s time to do something. So if an asset class has had huge outperformance, and grows as a piece of your portfolio, your portfolio’s telling you, ‘Trim it back.’ It forces you to do what we all know we’re supposed to. Which is selling into strength, and buying into weakness. When left to our own emotional devices, we often do quite the opposite.”

The State of The Credit Markets: “So, on a scale from one to ten, with one being [the state of the credit markets during the collapse of] Lehman, probably a five [right now]. And I think of it visually as sort of halfway back. … I think it’s going to continue, but I think the chances of going back up to a ten, which would maybe be the point where credit was as available as it was a couple of years ago, I quite frankly don’t think we ought to go back to that kind of credit availability. That’s what got us into this problem in the first place. … So let’s hope that cooler heads prevail. But I think … we’re on, a still ascending path, in terms of credit availability.”

Signs of a Recovery: “Much as it sounds good on paper to say, ‘We want an economic recovery, but we want treasury rates to stay at three percent and all prices to stay at $35.00, and the dollar to remain strong,’ like, it doesn’t really work that way. You can’t have all of that happening.

“For us, we’ve been watching and we’ve been saying that if you saw a renewed period of weakness in the dollar, a movement higher in both yields and commodity prices, other than a runaway situation for any of those, that would be telling you that the economy is gaining traction, that risk appetites are changing marginally.”

Market Timing: “I think that the best advice is, you … almost guarantee the lack of success if your primary goal is to try to bottom-pick and top-pick markets. You know, step back from that as your overriding goal, and just take a disciplined approach. And for the most part, you’re going to be so much better off in the long run.”

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