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Fear and Loathing in Equities

April 10, 2015BlogJustin Struble

 

Fear and Loathing in Equities

Fear and Distrust

CreditDonkey is a financial education website that recently conducted a survey questioning over 1,200 Americans about what scares them the most. At the top of the list was investing in the stock market, with 37% of the respondents agreeing that they feared equities.

For scale, the survey also indicated that 46% also fear death and 49% are afraid of heights. Apparently, more than one in three Americans consider investing in equities to be only slightly safer than using dental floss to bungee jump off the Golden Gate Bridge.

The reasons for investor fears are not overly surprising, as respondents cited the perceived high risks involved. Common responses included, “I’m afraid of losing money,” and, “I don’t have time to watch the market.” Others stated that they don’t trust someone else making investment decisions for them.

Two additional less sanguine results are that 73% consider investing in the stock market to be a form of gambling, and 31% believe that the stock market is rigged.

Let’s address these concerns one-by-one. First, in no way whatsoever is the stock market rigged. The U.S. equity market is much too large to be manipulated to the point where only a few profit on a consistent basis. That’s not to say that it’s immune to illegal activity, because it does quite often occur. However, it’s usually so small or short-term focused that a long-term investor would not be impacted.

Second, the stock market is absolutely used as a gambling medium by day traders, because there is simply no way that anyone can predict the short-term movements in markets or single stocks on a consistent basis.

However, those investors who follow the fundamentals of companies and ignore the day-to-day market movements are not gambling. Rather, they are creating an investment thesis and constantly observing its progress as it plays out. The difference may appear to be subtle but rest assured the two strategies couldn’t be more different.

In regards to the “fear” component of the market, take a look at the chart below which shows the return on the S&P 500 compared to gold from 1980 through 2014:

pic 1

The black line shows the return on gold has been 128% over the 34 year period, and the yellow line represents the S&P 500 return, which is over 1,800%. Even through the madness of the dot-com bubble and the financial crisis, investors have realized a higher average annual return in stocks than in gold, bonds, and most other forms of investments.

However, building profitable stock portfolios is not easy, and success typically requires a tremendous amount of education, skill, and experience. Those who lack these traits will most likely fall victim to one or all of the following: (1) fear, (2) panic, and/or (3) greed.

Simply put, the emotions that caused those respondents to say that they feared the stock market are likely the same reasons they have lost money in the past.

 

Up in the Air

Another common fear is the fear of flying, which usually ranks up there with public speaking and spiders. In three rather interesting ways, flying and investing in stocks are quite similar:

  1. Bad Events Resonate: Even though airplane crashes are extremely rare, people often perceive air travel as very risky. The same goes for equities in the sense that fraud and financial crises rarely occur, but when they do they resonate for years.
  2. You Need a Professional: Giving up control is scary, but if you have no experience as a pilot, would you ever get in a cockpit without training? The same applies to the stock market, so don’t try to do it yourself unless you have the proper training and logged years of experience.
  3. Real Risks Aren’t Obvious: Although turbulence (aka “volatility”) is how most passengers gauge the safety of a flight, pilot error is almost always the reason for issues on an airplane. The same goes for managing equity portfolios. Either making aggressive moves and/or panicking in challenging times is a sure path to suboptimal outcomes.

There’s no question that risks exist in the stock market. The U.S. will fall into another recession at some point in the future, and there will most certainly be another Enron and/or Bernie Madoff. These events will catch headlines and boost financial news network ratings just as they have in the past, but they will most likely be just as temporary as those that have come to pass.

The bottom line is that emotions are the reason investors lose money, and a well-diversified portfolio that is managed for the long run by a professional is the best recommendation to help investors overcome their fear of the stock market.

NOTE: Copy and paste this web address into a browser to access the survey results http://www.creditdonkey.com/afraid-investing.html

Footer for thought of the week

 

This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered Investment Adviser.

 

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