This paper introduces market barometers that are based on measurable and persistent investor behavior. I test the ability of U.S. market, international market, and capitalization barometers to predict S&P 500, MSCI EAFE, and Russell 2000 returns, respectively. The empirical results for January 1981–December 2020 are statistically and economically significant and cannot be explained by trailing equity returns or the Institute of Supply Management Purchasing Managers’ Index,1 one of the best measures of economic activity. Barometers are used to develop a set of trading rules that show evidence of superior performance when compared with relevant benchmarks over the period evaluated.
In our 2019 book, Return of the Active Manager, we declared that active equity management was alive and well in spite of the recent movement to index investing. We provided numerous ideas on how to improve the evaluation of investment opportunities as well as manage equity portfolios, from the perspective of behavioral finance.
Little did we know that a new golden era of active equity would commence shortly thereafter.
Join AthenaInvest’s C. Thomas Howard, PhD, CEO and Chief Investment Officer, and Lambert Bunker, Vice President, to explore the effect of investor behavior on the equity markets and how the Athena Global Tactical EFTs portfolio harnesses crowd behavior to enhance portfolio performance.
Published on Proactive Advisor Magazine June 23, 2021
Emotional investing errors are a significant impediment to building wealth over the long term. What are two of the most debilitating errors, and how can financial advisors help their clients avoid them?
Published on Proactive Advisor Magazine March 10, 2021
Bear markets trigger powerful emotions for many investors. Awareness of investor biases—which are compounded in bear markets—can help both advisors and their clients avoid making behavioral mistakes in turbulent times.
A growing trend within the investment industry is the direct application of behavioral finance to portfolio management. This represents a new direction, building on the industry’s current emphasis on how investors and advisors can avoid the emotional biases that destroy wealth. Its focus is on using behavioral factors as the basis for constructing an investment strategy, while at the same time avoiding the cognitive errors made by fund managers.
