“Fear Not!” Is Still the Best Investment Advice
Here’s a crude snapshot of a conversation I had with my client a few months ago. I think you’ll find it heartbreaking:
“I see you have all your investments in a money market account.” (Note: this is an extremely low-risk investment option)
“Yeah…I did that when the market crashed in 2001. I started losing lots of money, and my portfolio dropped from $120,000 to $80,000. I got scared, so I pulled out and switched to a lower risk investment.” He paused. “I think I made a mistake.” Then he grew curious. “I have $100,000 now. How much would I have if I would’ve stayed put?”
I cringed a little bit. The question is a recipe for regret. “Are you sure you want to know that number?” He nodded. So I did a little number crunching. Here’s the grand reveal: “You would have $200,000 right now,” I told him.
The man was mild mannered. He didn’t overreact. “Ohhhhh…..that’s a lot of money,” he said. But even if he couldn’t sense the full effect of that sting, I felt it for him.
What kills me is that it was just one, fear-based decision. A natural, understandable fear, of course, but that doesn’t change the fact that it led to a poor investment decision, one that cost him $100,000.
In fact, fear almost always leads to poor investment decisions. It consistently causes investors to sell when the market hits rock bottom and buy back in when it is already well on its way to recovery. In other words, fear causes investors to disobey the most fundamental rule of investing: buy low and sell high. It subdues logic in its cage and releases an irrational beast, bent on destroying your portfolio.
Case Study: The “Great Recession” of 2008
2001 isn’t the only time this happened, and my client certainly isn’t the only case. The “Great Recession” also caused a great deal of panic and poor decisions. If you check out this graph created by BlackRock Mutual Funds, you’ll see what I mean.
Allow me to help a bit with the interpretation. The blue line represents the stock market performance. The light blue bars represent money invested in mutual funds, or…in finance jargon… the “Net Equity Mutual Fund Flow”.
You’ll notice something quite peculiar if you attend to the circled section of December ’08, the stock market crash. During the fright and terror of that lowest dip, a lot of people sold their mutual funds. The blue bars at their lowest point (far below the axis) evidence this.
And when did investors buy back in? Note that the blue bars follow the stock market line very closely. By the time most people bought back in, the market was already near its next peak. People were selling low and buying high! This is not a good investment strategy.
A Little Advice For a Big Problem
No one knows what the market will do tomorrow. It might go up. It might go down. It might fluctuate a little. It might fall or rise dramatically. There are a lot of uncertainties in investing.
But one thing is for sure: the stock market consistently grows over the long haul. According to distinguished finance professor at Wharton, Jeremy Siegel, it has grown an average of 6.5-7% per year over the last 200 years. But one of the major problems is that fear zaps long-term vision, blinding investors to the future possibility of growth as they watch their hard-earned money plummet in the present.
So here is the little piece of advice: Like an angel who appears in the dead of night, “Fear not!” The sensationalist media of apocalyptic proportions is lying to you.
As long as your portfolio is truly diversified and matched to your risk tolerance, as long as you regularly review your investment strategy with a professional, don’t lose your head!
You’ve got nothing to fear but fear itself.
Need a risk analysis at no cost to you? Call Seniormark at 937-492-8800.