Yoshikami: Dow 11,000? The Sands Shift Yet Again

With the Dow currently approaching 11,000, emotions are running high that the “good old days” are back.

This sentiment is generally based on a perspective that if the market goes up, all is well with the underlying economy. To many, green numbers scrolling along the bottom of the screen means things are going well; “I'm making money this week after all, right?".

Well; maybe not.

As institutional investors, here is how we look at market sentiment.

Short-term, it matters.

In trading your portfolio, sentiment can be an important factor to consider as you adjust and allocate. But while the current, transient wave of emotion must be taken into account, it's absolutely critical not to allow the latest headlines or market movements to dictate your long term plan.

This is the one behavioral mistake made by most investors; getting caught up in feelings rather than rational thought can be dangerous to your overall investment strategy.

New York Stock Exchange
Photo: Oliver Quillia for CNBC.co
New York Stock Exchange

Apple, for example, is riding a wave of sentiment that they can do no wrong.

Let's face it; despite "antennagate" they have done a lot right.

A doctor friend of mine frequently reminds me about the wonder and brilliance of Steve Jobs and Apple Computer. To a large degree I agree that this company is executing well. However, one should be very careful to assume that a company's share prices are immune from downdrafts, even if their company is in high demand. We are not negative on Apple, but just want to illustrate how strongly sentiment can play into investment decisions. Anyone remember when Cisco was touted as the first trillion dollar company? Don't think the good companies can't trade lower? They can.

Citigroup is a company currently shrouded in negative sentiment because of its obvious stumbles over the last several years. The naysayers and negative analysts have factual reasons why they think this asset has problems. Still, one cannot discount the overwhelming dour mood about banks in general which has impacted stock prices and analyst perspectives. Emotions matter, but emotion may constrain some from looking at an asset like Citigroup with a more balanced perspective.

General Electric , which appears to be positioning itself well for the next 10 years of global growth, has a huge overhang on it's stock price because of uncertainties related to it’s financial services unit. While these concerns are certainly justified, one must determine whether sentiment is excessively gloomy. Our take is that this negative sentiment is probably overdone. This is a diversified global company that is not afraid to take action to position for the new global economy and one day (who knows when), credit conditions will stabilize. (*Editor's Note: GE is the parent company of CNBC and NBC Universal)

Headlines vanish in a click.

The entire mood and tone can change based on what’s in vogue today. Websites will scream panic then euphoria, seesawing from week to week. Puncture all this hot air with a recognition that facts and emotion together dictate market movement. Your response should all be assessed in the context of your personal circumstances and goals.

There's a new formula (actually a forgotten formula) that investors should integrate into their decision making process. Facts plus emotion, combined with your investment philosophy/goals, should be the foundation of your thinking and decision-making process. Recognize and accept the irrationality that exists.

"The market is essentially a very knowledgeable, well-educated adolescent animal driven partly by reality and partly by fear/greed. Mood swings are rampant." -YCMNET Advisors, Michael Yoshikami

Most think that investment professionals and investors carefully analyze data and make non-emotional decisions about portfolio strategy. Sometimes yes. Many times no. It is usually more complex than that.

The market itself is not rational nor are its participants. For that reason the market is essentially a very knowledgeable, well-educated adolescent animal driven partly by reality and partly by fear/greed. Mood swings are rampant. It's not an underestimation to suggest that the trading market is perpetually entrenched in this adolescent phase of development. If this is true, investors need to be aware of this condition while navigating today's murky investment waters.

Welcome to the world of perpetual adolescence.

Recognizing and acknowledging the reality of this unruly market can go a long way toward easing your concerns and assisting you to gain a balanced perspective in making investment decisions.

Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.