Valuation-Informed Indexing #508: Investor Psychology and Economic Realities Are Very Different Things

I’ve posted Entry #   to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Investor Psychology and Economic Realities Are Very Different Things.

Juicy Excerpt: Say that an investor is spooked by a price drop and is trying to determine whether to stick with his stock allocation or not. The one who believes that stock prices are determined by economic realities worries that the economic factors that have pulled stock prices down are likely to remain in place and continue to pull prices down some more. The one who believes that stock prices are determined by shifts in investor psychology is encouraged by the fact that the price drop has diminished the effect that irrational exuberance has been having on stock prices. The lower stock prices go, the better the long-term value proposition offered by stocks. That investor sees falling stock prices as a signal to increase her stock allocation.