The Barron's cover story was titled Just Don't Lose It and it tried to explore the extent to which investor psychology has shifted to being more skeptical or distrusting and the article also tried to offer some solutions. Candidly the article was a little thin but the questions raised are interesting as is the pursuit for a solution.There was an interesting stat about how many Gen Ys don't trust stocks and so have a high portion in cash. Also mentioned was how well dividend payers did in 2011 which is supporting evidence of people eschewing growth in favor of something more predictable; the dividends.
My take on these issues has been the same for a while. I do believe stocks and markets still work but there has been an evolution. Plenty of markets and plenty of individual stocks have carried on even as the SPX has floundered and there will continue to be plenty of markets and individual stocks that carry on if the SPX continues to flounder.
Certainly this means the task is more difficult and it is reasonable that people don't want to spend more time on their savings and their investing than they used to but success probably means just that; spending more time than they did 15 years ago. Fortunately the tradeoff is very simple to understand even if not easy to pull off. If 2-3% annually is a more likely outcome then more needs to be saved or you need to work longer or spend less or any combo of the three.
As far as the actual title of the article; people feel losses far more than they feel gains. This is no doubt something you've heard before but probably pertains more to specific holdings but another aspect if just don't lose it is the permanent impairment of capital (I know this as being James Montier's term) which is where people are forced to go back to the drawing board with their financial plan which is a bigger deal than buying a few shares of Netflix (NFLX) at a bad price.
The article notes the extent to which this has happened to people and the extent to which people are now more aware of this possibility and fear of it is keeping them out of stocks. This is where the work needs to come. Obviously I am biased toward a defensive trigger point (the 200 DMA) and avoiding big bets within the portfolio by staying diversified. One thing that I think helps me do my job is that I have respect for whatever clients did to get their money and take the regard for their money very seriously.
It is much easier for an advisor to explain why we didn't make more than it is to explain why we lost it all. This applies to people managing their own money too.
4 comments:
You are being most kind when you say the Barron's article was "thin".
Roger,
You seem to fit the role of a true fiduciary. Obviously you know costs are a potential drag to client returns so I will be extremely interested to see if your new ETF will keep management fee to 50bps or less.
Look no further to Faber's GTAA as an example of investor dissatisfaction with high fees. Faber talks the book but does not back it up, hopefully you are not the same
Saving more and working longer?
You are correct, but I doubt that the government largesse machine or the Fed is supporting that mindset.
Quite the contrary.
T
I think because of a variety of fractors, the crooks on Wall Street . . . Madoff, Boesky, Milliken, Corzine, just to name a few); the "Flash Crash"; and HFT, have forever driven droves of retail investors out of the market. Most of my friends are interested not so much in return of capital but rather, return of their capital.
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