9/6/2013 4:30 PM ET|
Mistaken lessons from the financial crisis
Too many investors drew wrong conclusions from the financial crisis of 2008. Those who stayed on the sidelines missed out on large returns.
For some investors, the upcoming fifth anniversary of the financial crisis of 2008 is also the five-year commemoration of the last time they were fully invested in the stock market.
The Standard & Poor's 500 Index ($INX) lost37% in '08, and while it has averaged an 8.3% per annum gain ever since -- enough to recover from that loss -- scared and scarred investors have had a litany of reasons to avoid investing, and have been so busy focusing on those issues that they forgot the reasons to participate in the stock market.
They didn't invest in 2009 because the sting from '08 was so fresh and they saw no quick turnaround. In 2010, the fallout from the financial crisis was creating a debt emergency in the eurozone, while 2011 saw concerns that the Federal Reserve was inflating a bond bubble at a time when world markets were suffering. In 2012, investors worried about problems that had surfaced in China's market and the looming fiscal cliff in America. This year, it was "Look at how much the market ran without me; you know a correction is coming, and it will happen the minute I am back in."
In fact, over my desk there's an 80-year stock-market timeline that shows one historic event after the next and virtually every one of those noteworthy points could have been used as a reason not to invest at the time. None of them did more than slow what looks like an inevitable climb toward the new heights the market has reached this year.
"You can always find reasons not to invest, that you can rationalize and that make sense for why you shouldn't be in the market; even in the good times, there is always an excuse to be on the sidelines," said Scott Wren, senior equity strategist at Wells Fargo (WFC) Advisors. Wren has noted that retail investors have spent the last five years with too much in cash, underinvested in stocks.
"They're afraid they will outlive their money, and for good reason," Wren said. "They're investing as if the days of a 5% certificate of deposit are coming back -- God only knows when that will happen -- and they're so afraid of what can go wrong in the stock market now that they're not participating in global growth."
Terrified investors won't get comfortable with the market overnight, even after a run to record-high levels; jumping in with both feet now would create a lot of stress.
But being so focused on the potential for the next crisis makes it hard to see what makes the most sense long-term for an overall investment program.
It's important to look for reasons to invest rather than for excuses to stay on the sideline.
"Whether one likes stocks or not, we all have to take care of ourselves for our future. Avoiding getting better at it is not a solution," said Donald MacGregor of MacGregor-Bates Inc., a Eugene, Ore., firm that researches judgment and decision-making. "Developing and applying discipline is part of the solution. We can't avoid markets."
MacGregor noted that many people who have underinvested in equities or avoided the market altogether are "probably harboring thoughts that their home will be their future," specifically that they can downsize and pocket the profits to get something that the securities markets haven't delivered.
What they're missing is that it's still about markets, and the housing market in recent years has disappointed investors with the same kind of frequency as the stock market. The same can be said for markets in gold coins, collectibles, hard assets and virtually anything, because all markets have cycles that, with unfortunate timing, can lead to disappointments.
"The discipline that is required is cold cognition and careful reasoning," MacGregor said. "Doing nothing is simply running a risk, rather than consciously taking risks based on due diligence and good quality judgment."
Christine Fahlund, senior financial planner for T. Rowe Price (TROW) noted that instead of looking at the detriments of market downturns, long-term investors should be thinking about their benefits, especially when it comes to monthly contributions to retirement plans, which buy more shares when the market is down, promising greater returns so long as the long-term direction of the market is up.
"You can be happy when markets are down as well as when they are at their peak," she said. "Stay in the market, regardless of the market cycle, because over the long term you always need to have a portion of your portfolio in equities to provide the growth opportunities and inflation protection you will need over the decades that lie ahead."
Of course, that is easily forgotten in the middle or the aftermath of a crisis.
That's why the fifth anniversary of the 2008 meltdown is a difficult point for investors who are stuck in the past, because it will serve to remind them of the trouble they lived through rather than focusing on what has happened since.
While the population of scared investors has dwindled as the bull market has gone on, plenty of people have overcome their fears only to a point of dipping a toe back in to test the water temperature; five years later, the anniversary will remind them of why they won't believe experts who say "Come on in, the water's fine."
"When (an investor's) focus is on the next problem, they are pretty much in what I would call the 'Twilight Zone,'" said Diahann Lassus of Lassus Wherley in New Providence, N.J. "They believe whatever they invest in will have the same result, basically losing them money.
"We always talk about how we get stuck in the current trend," she added. "If the market is going up, we expect it to go up forever. If the market is going down, we expect it to go down forever. Unfortunately, we sometimes get stuck and are unable to reset our frame of reference to the next trend."
Instead of looking back at the financial crisis, investors should be looking to move on from it; despite all of the reasons for worry and the lingering concerns, record highs show that the market has.
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Why isn't High Frequency Trading mentioned? This will eventually implode the markets.
Intelligent, market bystanders will stay that way.....having experienced the fact that the "1% er's" will always have "advantage-information" ..they do not have...on top of seeing any meaningful, financial regulation bought out by those "Bush's too big to fail"
The real reason for this article...is that without "little person's money" the market's 3 to 1 loss ratio is being absorbed by larger players....which could domino up to suck in some small "1% er's)
Now wouldn't that be a
What GOES around.....
Just because the Markets have recovered is hardly a case for pushing folks in now or ever. There are a million ways to make money. The stock markets just happens to be One Way. I don't have any problems with folks investing, I do however have a HUGE problem with folks telling you that you Have to Invest in stocks. That's total BS.
Folks are not as stupid as those in the finance industry like to believe. Almost everyone knows the Global Financial issues and how badly the markets are manipulated these days. It's literally Russian Roulette to be a long term Bull in light of what is actually happening these days. If folks want to invest, fine, just don't act like folks can't literally lose everything by doing so.
This assumes that every person understands markets and investing. To me, having a professional say that about the average person is like a doctor saying, "Patients can always find reasons for not being operated on if we hand them the MRI results and tell them to decide if they need one."
THAT, plus the obscenely high fees, are why the 401k system now in place does NOT work. One study shows that the average person needs to contribute twice as much to a 401k to get the same payout as a defined benefits pension (http://www.nirsonline.org/index.php?option=com_content&task=view&id=122&Itemid=61).
So, instead of the jealousy we see on these boards about people getting pensions, they should be arguing to get their own. Boosting Soc.Sec. by 33% but gradually raising FICA taxes would be the way to go today. Of course, anyone suggesting that would be targeting in the next election.
Apparently you really can use paper to cover up and conceal a burning fire for quite awhile, as long as you use enough of it. Keep piling up freshly printed money fast enough, and soon folks forget about the fire underneath. Every now and then, some smoke finds its way out, and maybe even the tip of a flame becomes visible. But the Fed is quickly on top of the situation, dumping another load of paper on the weak spot, before anyone has time to panic or even realize what's going on.
There are those who view this as nothing but a big pile of money, ripe for the taking. They are happily dancing on top of the pile, thinking they hit the jackpot.
Others view this as a huge fire, about to engulf everyone and everything. They are standing on the sidelines with water hoses and fire extinguishers.
And then there are the "in-betweeners", who know there's a fire burning underneath, but they aren't sure how big and powerful it is. They are nibbling at the edge of the pile, grabbing what they can, while being mindful that at any moment, they might get burned.
As for me, I've set up a lemonade stand a safe distance away, because everyone standing around the burning pile of money gets thirsty eventually.
"which could domino up to suck in some small "1% er's"
You'd be more precise if you said it was the culture that keeps them one-percent-ers that is failing at a hyper-rate. What "went around" was a systematic removal of capable people, replacing them with degree'd drones who utilize programs to homogenize everything. What "comes back around" is a dysfunctional machine that has no sustainability. The Chinese want QE to continue forever because it creates poor people who have to buy their cheap stuff, but in doing so- eliminates the substance that makes a wealth class by taking our cash offshore. The alternative-- ending QE wipes out the wealth class's investments.
Other than your health, folks biggest concern is making sure they have the right skills sets to make a decent income regardless of the current and or future state of the economy, then you will never have to worry about Stock Markets. If your skill set are always in high demand, you will never have to worry about stocks. Historical Charts about stocks and or bonds are worthless other than something to wipe your backside. We are in uncharted waters, this Chuck guy will never figure that out.
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