According to a new Nationwide Financial survey of potential investors with at least $100,000 in investible assets, 83% fear another financial crisis and 62% are scared of investing in the stock market. That is more than the 58% who fear death and the 57% who fear public speaking. The only common fear that evokes similar distress is skydiving (81%). [i]
Wow! We need to dissect the ramifications of this study a little bit.
The avoidance solution exhibited by too many people is to never skydive (arguably, fairly rational) and never invest in the capital equities markets (stock…not so rational). Unfortunately, we think the referenced behavior is actually worse in real world dynamics in that most people don’t invest in equities for a long time, and then flip-flop and over invest when they see everyone else doing well (fear, followed by regret, followed by greed). As markets naturally move in cycles, those ‘late’ investors then have missed most of the gain on the way up, are not good at controlling behavior and when things fall a bit they panic and sell out (remorse, followed by fear, followed by capitulation). This behavior is a little bit like finally deciding to jump out of a plane to skydive; once you decide to jump and the rip-cord safely opens the chute, you don’t want to do something irrational just because it’s scary out there. Of course it’s scary out there…but a free fall does not yield a safer landing.
For those of you who say; “That scenario is totally unrealistic, nobody would do that”, we say “Not so, Grasshopper”. Let us share with you some excruciating but insightful data. It comes from JP Morgan, who looked at how investors did in performance over the last 20 years VERSUS the assets that they had to invest in (be it stocks in the USA or internationally, REIT’s, bonds, etc.). They found that EVERY asset class did somewhere between 6% and 9% over that last 20 years (see below). However, the poor slob investor must have pulled out of his chute; he/she did worse than any option. To add insult to injury, beyond bad performance against all options, the investor did not even keep up with inflation. I.e. In real terms, the investor actually lost money.
Thus, Grasshopper, we seriously need to learn from our past mistakes. In summary form, they are;
- You don’t take on more risk than you need to do
- Diversification is good, not only because it minimizes risk, but because you never know which investment will do best in any one year (flipping everyone out, the USA market is up 16-18% through July…which is why we said we’d stay in it in spite of the predictions of Armageddon)
- When you invest, you must realize that Pogo was right; we are our own worst enemy
We came into this industry to get the best investments we saw possible out of the 80,000 choices available. Further, they were passive investments not available to the general public so they were exclusive and did not have all the marketing costs loaded on the funds. But in reality, notwithstanding the truth of those comments, we have evolved to the realization that we could have secured average-order investments, and by helping people simply be better investors they would have done monstrously better than their peers. Our competitive nature would not allow it (hey…if you can get the best parachute, why not), but being more knowledgeable about what makes a great investor is infinitely more powerful and productive.
[i] “Americans fear another financial crisis, are spooked by investing” (Michael Shagrin, Investment News, July 24, 2013)
