12/2/2013 9:00 PM ET|
Fear is killing your investments
Hockey great Wayne Gretzky famously said, 'You miss 100 percent of the shots you don't take.' This mantra applies to investing as well.
Wayne Gretzky -- the greatest hockey player of all time -- famously said that "you miss 100 percent of the shots you don't take." Off the ice, however, the Great One confesses he was "not a big risk taker . . . I stay away from things that I don't know anything about."
Two surveys released last month show that most investors better relate to Gretzky's second sentiment. Many are still afraid of the stock market -- a fear created during the financial crisis five years ago -- and those investors have not been taking their shots. As a result, they have missed out, not only on the rally of the last few years, but on the opportunity to be better positioned for what happens next.
BlackRock last month released its first Global Investor Pulse Survey, which showed that while steady gains have pushed some stock markets worldwide to all-time highs, "most people are not comfortable taking on more risks to achieve better returns." The survey polled more than 17,500 investors (including some 4,000 Americans) across a range of income levels.
In the U.S., 48 percent of investible assets were being held in cash, with just 18 percent in stocks and 7 percent in bonds, according to the survey.
That's ultra-conservative even by the standards of common rules of thumb, like the old saw that says investors should take their age, subtract it from 100 and use the result as a rough guide for how much of their portfolio should be in equities.
Meanwhile, the Investment Company Institute's annual survey of U.S. households found that even people who own mutual funds are less willing to take investment risk than they were before the financial crisis. "The dramatic stock market decline from October 2007 to March 2009 appears to still linger in investors' minds," said Sarah Holden, ICI senior director of retirement and investor research.
If investors ever wanted or needed proof that Wall Street climbs a wall of worry, they have gotten it in the last five years. And they have seen it reinforced over the last six months, as everything from highly discussed Federal Reserve policy changes to international troubles in places like Syria to a government shutdown and more made the headlines feel like there could be a market implosion at any minute.
And yet, if you shut off your news feed six months ago, you would be turning it on now mostly happy with how your portfolio has grown, blissfully unaware of all of the day-to-day miseries you missed.
That's not encouragement to "Don't worry, be happy."
Instead, it's an urging to properly understand risk.
Investment pros like to say that risk generates return. Thus, a "risk-less portfolio" could also be described as a "return-less portfolio." That's distinctly not what most investors are looking for; if they were, they'd put their money in the mattress or the piggy bank.
The bigger problem is that investors are looking for portfolios that are devoid of risk, as if such a thing actually exists.
Put your money in the mattress and you have completely avoided stock market risk, the chance that your principal will be lost, but you have embraced purchasing-power risk, the potential for your money to fail to keep pace with inflation over time. (In your mattress, you also would have risks about how a fire, theft or other calamity might threaten your nest egg.)
It works that way for virtually every type of risk, where you can avoid each hazard only by exposing yourself to another one.
"Getting overly conservative is as risky as anything else that could hit your portfolio," said Steve Wood, chief market strategist for Russell Investments. "A riskless portfolio is not what people would want to orient themselves around, because that would be low-return or return-less."
In this economy and with the current market, investors also have little choice but to accept stock market risk in part because the Federal Reserve's policies are virtually forcing their hand. While interest rates overall have been creeping up, they're not rising on most savings vehicles yet.
And, it's fair to say that to this point, Wall Street has been climbing the wall of "unnecessary worry." Over the last five years, the Standard & Poor's 500 Index ($INX) is up 15 percent annualized; factor in the crisis and extend the time frame to a decade and that gain will be cut in half.
But at around 7.5 percent, the market has delivered in the last decade roughly what investors have been taught will be their annualized return from equities.
Ironically, studies show that those kinds of equity returns would disappoint roughly half of investors while appealing to the other half. The unhappy investors are the ones expecting a greater-than-10-percent return for taking the chance on equities, while the pleased investors are simply grateful that they didn't suffer losses and got something significantly better than they could have earned staying in cash.
"You can't get stock market returns without taking risks," said Rob Kron, director and head of investment and retirement education for BlackRock, "but you can't avoid stock market losses without taking other risks."
Investors, to borrow from Gretzky, don't need to be "big risk takers," but they do need to take risks, and understand why they are taking them.
If you don't "take your shots" because you are taking a calculated risk and believe your portfolio will benefit long-term by waiting until later to try to score, then you have a strategy.
But if you are not taking shots because you are still scared about events now more than five years into the rearview mirror, you need to recognize how that is going to affect your ultimate score. You're kidding yourself when you think that kind of strategy -- even if it holds you steady -- is not "losing."
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hey Wayne, did investors over the past ten years who sold out after taking 50 or 60 percent downside hits to their life savings and vowed never to own another stock - did they make 7.5% per year?
you look in the 20/20 hindsight mirror and elaborate on an improbable rally and now encourage investors to buy at an insane market top while the free-money punch bowl is taken away. better to move to the french countryside and just write a nice fiction novel where you can't hurt anybody and leave the investing to certified professionals?
btw, the best hockey players generally contain risk and go with the high percentage shots while mostly passing to teammates. they also play great defense ....
I didn't miss out on the phony Fed sponsored rally of the last few years, but, I'm sure cashing in on it now and selling some of my equity holdings.
I wonder what the great Gretzky would say about that?
And the correct answer, of course, is "Who cares, he was smart enough to play hockey instead of the market".
Finally an Article I can mostly agree with. I am 99% invested in stocks ( Mostly Individual Stocks) and I have been rewarded very well. Will there be a downturn ? More than likely but unless the world comes to an end it will bounce back, it always has and always will.
Just because you've been invested in equities doesn't mean you've enjoyed those stellar returns. I've been heavily invested in precious metals and mining stocks and thus I have taken a bath.
More than ever reason I suppose to buy strictly the index funds and not try to invest in particular sectors.
Without the Fed's "TARP" program including QE 1,2,& never ending 3, every Major Bank, every Major Brokerage ,All Real Estate,Many Insurance Companies, and many more "Blue Chip Companies "would have been vaporized, vanished in one massive game of "MONEY BALL" and ol' Chuck here would be blogging about fear while pausing occasionally to ask "would you like fries with that".
Maybe that's Chuck's ultimate message to us- no matter how bad we "the financial experts" here on Wall Street blow it, "Uncle Sam" will always be there to bail us out,-and that should put your mind at ease.
The best investment a person can make is in themselves. You never want to rely on someone else and or something else to make you wealthy. Stocks are just a bonus. Stocks are also Risky regardless of your investment skill level. Today, that is far more true than ever before. If that wasn't, we would NOT have the Global FEDS printing to infinity. We would not have Corporations engaged in Massive Corporate Stock buybacks to support earnings and their own Stock Prices.
We are in a Massive Credit Bubble, everyone knows that. It's the unprofessional types that are attempting to squeeze the last dollar from investors. Just because Markets will literally blow past Reality hardly mean that they won't come back to and under Reality. Just because folks talk about these risks hardly means they have not benefited from the Markets rise. There are literally countless ways to invest in Markets. These bogus types that write articles only want you to invest by holding to infinity while keeping the blinders on. Meanwhile, the Big Boys are selling out each and every chance they get. They sell while telling you to get in, that's the only way they can get a good selling price.
RISK !! That's what is going through the minds of everyone right now. Households across the nation are examining how much to invest/ save and how much will we need to weather the coming year.
Individuals have been concerned about their healthcare insurance; "will my policy be canceled"?, What about my employer based insurance, will the cost rise? And the insurance companies themselves are concerned about how or where to mail the bill due to the Obamacare fiasco. If the insurance companies have uncertainty in their own forecast, you can be sure that all markets will have uncertainty too because this is where your premiums end up- being invested in the markets to generate profits for these insurance companies and to cover the claims.
Now bring this mind set down to the individual trying to decide how much to spend on their Christmas gifts. Retailers already have been slashing prices to get you in the stores however we saw over the weekend that sales are less than last year-why?- because of the deep discounts they're giving. And most of this spending will end up increasing individuals debt on their credit cards. Even though it seems that more people were out this year, the retail stores are going to have a hard time with their profitability- and this is why the markets will have a negative outlook going into 2014. Add to that the looming government shutdown -AGAIN- and you have a recipe for a correction. (NO THE MARKETS NOT GOING TO CRASH V_L!!) But it might be a good time for some well placed shorts for some profit taking before the end of the year.
So NO FEAR!! That's my surfing motto I was brought up with and continues to serve me well in all areas of life. So go ahead- take your shot before you miss your chance.
"Hockey great Wayne Gretzky famously said, 'You miss 100 percent of the shots you don't take.'"
His dad said-- 'Wayne, never invest in a rigged market'. We see these Kool Aid articles daily now. The FACT is-- Wall Street is dying from a lack of new "stupid" and the sheer cost of operating the largest scam in history. If you are dumb enough to remain in-- two things straight ahead: first, you'll lose it all because the game is rigged, second, to add insult to your victimization, your virtual activity is being tracked and the BILL for this folly will be ALL YOU. Business and Finance Platforms are wealthier than ever before... but haven't generated ANY sustaining economy. The obvious-- CRUSH them, squeeze the money out and make economy with it. BBQ the turds in suits as a nice venting gesture.
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