By Cam Goodwin for the Nashville Business Journal | October 2014
The financial unrest that began in earnest in 2008 continues to cast a long shadow over the investment world. Despite the consistent uptick in the economy, unemployment numbers continuing to drop, and dare we say healthy S&P 500 index, many investors still eye the market with skepticism and distrust.
Without belaboring the message that the stock market runs in cycles — good and
bad — the important action item to note here is that opportunities for growth in the market exist, but not if you are sitting in the shade.
Looking for Signs of Trouble
In the wake of the recession, rather than making sound long-range decisions based on strategy, calculation and projection, investors are seeking protection from potential pull backs in the market. In essence, the investment community is proactively looking for signs of trouble instead of identifying opportunities for growth.
Consider that collectively U.S. investor portfolios have 27% in cash and 46% in stocks which is a record low statistic. If you look at the international picture, European investors have 52% in cash and Asian investors have 54% in cash.
These portfolio break-downs indicate that investors are extremely cautious, and as a result, they are moving a lot of their money into “less risky” bonds. The problem here is that when interest rates rise, bond prices fall. So this emotional paralysis about investing in stocks is essentially trading one financial conundrum for another, and the trend is being driven by an uninformed emotional response to an ebb and flow cycle that has existed since transactions were based on the barter system.
In the last 20 years, the S&P 500 has averaged a more than a 9% annual return. The average investor? 3%. The discrepancy is the result of abandoning solid investment strategies for knee-jerk decision making that ultimately means people buy and sell at the wrong times for the wrong reasons.
Balancing Euphoria and Fear
The converse of this current situation is an unchecked euphoria about the market’s recent leaps. That’s an emotional scenario that is cause for an even greater alarm than our present situation of hesitancy and hyper risk aversion.
Still, a little positive reinforcement about the potential in the market is in order. Should investors keep the unaccountable activities of 2008 in mind when making investment decisions? Absolutely. But should they allow the recessionary hangover to enable this continued net outflow from U.S. stocks? Absolutely not.
Finding a balance between frenzy and complacency has been a strategic principle of financial planning since the industry’s inception. It’s the emotional decision making that causes the radical swings and shifts. Pull that fearful component from the investors’ perspective and they will emerge from the shadow into opportunity.