The Reuters/University of Michigan consumer sentiment preliminary index for February that was reported last week declined slightly from the late January number and it was lower than expected as consumers continued to fret over unemployment. The index is now down 24% from January 2007, according to data from the St. Louis Federal Reserve.

Ironically, when consumers are glum, that could be good news for the financial markets.

A 2002 study by Meir Statman and Kenneth Fisher found that, “Low consumer confidence is followed by high stock returns more often than it is followed by low stock returns.”

That seems a little counterintuitive because you would expect apprehensive consumers to be in no mood to buy financial securities and push their prices higher. On the contrary, though, the authors said, “When people lose confidence as consumers, they should regain it as investors.”

So, how does this make sense?

Not surprisingly, declining financial markets tend to drag down consumer confidence. However, at some point, financial markets typically revert to the mean and start heading up again. Often, financial markets start heading up before consumer confidence does.

Does this mean you should base your entire investment strategy on the level of the consumer sentiment index?

Of course not! This is just another example of why your best strategy is to have a plan in place and ignore the market “noise.”

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How will we know when the market hits rock bottom and starts a new secular bull market?

This is one of those questions where if we knew the exact answer we could probably make a fortune. Unfortunately, no one cannot pinpoint the bottom of a bear market in real time, but according to money manager John Hussman, there’s an anecdotal measure that might help us narrow the timeframe.

In his June 29 commentary, Hussman discussed the concept of “assumed permanence of unusual conditions” to help describe both major market peaks and major market lows.

He referenced the 2000 technology peak, the recent housing peak, the 2007 stock market peak and the 2008 oil peak as examples of investors believing in the “assumed permanence of unusual conditions” to justify such high prices.

We now know that those “unusual conditions” were anything but permanent.

Conversely, he said the same sentiment applied back in early 1982 to help justify why the stock market was dead and would continue to be dead for years. Of course, in August 1982, the stock market took off on an 18-year bull run.

What we’re really talking about here is that at certain times, investors might become so euphoric or so despondent that they believe the current trend will last for many years.

Today, investors are understandably concerned about the financial markets.

We’ve been in a down cycle since October 2007 and there’s plenty of anxiety about how much longer it will last. But, have we reached the point where many investors take it as a given that these unusual economic and market conditions will be permanent?

Hussman suggests that when or if we reach this point of “assumed permanence of unusual conditions,” then that might be the time when we create a floor from which a new long-term bull can begin.

It’s a great theory, but no one has an empirical way of measuring when we hit this point.

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“I don’t have ten years to wait for the market to recover. I’m retiring next year!”

Sound familiar?

As the difficult market continues to evolve, the media doesn’t hesitate to make predictions about how long the path to recovery will be — which is why those on the verge of retirement end up petrified.

Once they dig down into the process of establishing true retirement goals and figuring out their choices, however, many near-retirees come to recognize that they can, in fact, wait for the market to recover.

Why is “selling low” such a temptation?

Many people on the verge of retirement are doing just that: selling their stock holdings, permanently locking in losses, and re-investing those deflated funds into fixed income at historically low rates.

Unfortunately, this very emotional reaction is the result of:

• Not properly defining retirement goals
• Buying into negative media forecasts – which are often based more in hype than reality
• Believing there is no time to wait out a market recovery

While your principal may be safe in fixed income investments, your purchasing power is not. The income from these investments simply cannot keep up with the rate of inflation at 3.6% in 2008 and 4.02% over the last 30 years.

What should your real retirement goals be?

Your true retirement time frame shouldn’t resemble the panicked quote at the beginning of this article. Unfortunately, many line up their retirement goals with the difference in time between today’s date… and their retirement date.

Instead, think of the day you retire as the day you begin achieving your goals. You want to prepare to:

• Generate income over 20 to 30 years or more
• This income must increase purchasing power each year

In other words, a wise retirement goal time frame extends decades beyond the retirement date. If you want to create an income stream that provides you with purchasing power every year, you’ll need to craft a diversified investment strategy.

A fixed income investment strategy will simply not work.

Can you really wait for the market to recover?

As I write this on February 17, 2009, the S&P 500 closed at 789.17, down from the October 9, 2007 high of 1565.17.

Suppose the market takes ten years to return to this level.

In order to make this happen, the market’s annualized return would need to be 7%, based on price alone, and not including dividends. The S&P 500 currently yields 3.20%. If you add in dividends, the total return is 10.20%.

That’s right — by waiting for the market to recover, you give yourself (and your retirement income) the chance to earn much more than any fixed income investment could over the next ten years.

Of course, market returns are not guaranteed and will vary going forward. But.

The truth is, you can and should wait for the market to recover if you are planning to retire.

By defining wise retirement goals, building a diversified portfolio — and understanding the deep impact of media “scare tactics” on your perspective — you’ll be on your way to a more comfortable, productive retirement planning process… and becoming a resilient investor.

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Every January, USA Today asks the “best minds” in the financial services industry for their thoughts on how the S&P 500 will do.

As you can see below, their predictions were less than stellar in 2008.

2008 Predictions for the S&P 500

• Abhijit Chakrabortti (Morgan Stanley): 1520
• Richard Bernstein (Merrill Lynch): 1525
• Stuart Freeman (A.G. Edwards): 1575
• Rod Smyth (Wachovia Securities): 1590
• Thomas Lee (JP Morgan Chase): 1590
• Tom McManus (Bank of America Securities): 1625
• Abby Joseph Cohen (Goldman Sachs): 1675
• Tobias Levkovich (Citigroup): 1675
• Jason Trennert (Strategas Research Partners): 1680

And the real result? The S&P 500 began 2008 at 1468 and ended at 885

Source: USA Today. 2008 predictions for the S&P 500. January 2, 2008.

2008 was an unusual year, no doubt.

But if “expert strategists” can’t gauge even the ballpark performance – let alone the direction — of a single index right, how much confidence can we have in their ability to build a quality portfolio?

Need further confirmation that active management creates significant risk?

Check out their ability to choose successful stocks: USA Today asked five prognosticators to select their top 5 stocks for 2008.

Their top picks returned -44% in 2008 … easily outpaced by the S&P 500′s -37%.

This track record sends a very important message to investors: you shouldn’t depend on what these experts see in the crystal ball for 2009. In reality, flipping a coin would likely offer you the same level of accuracy.

While markets can be chaotic and unpredictable in the short term – as we are experiencing now — over the long-term they are remarkably efficient, and almost impossible to beat.

Resilient investors make the choice to follow a prudent, diversified, consistent approach… and stay the course.

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