You Can’t Make Money With Your Head in the Sand

by Alyssa Oursler | February 7, 2013 6:15 am

Back in December, I asked a simple question: Why aren’t young people investing?[1]

While there’s far from one cut-and-dry reason, the bottom line is that Generation Y seems skeptical about diving into the market. But I’m seeing more and more of two issues I highlighted: fear and ignorance … and not just from youngsters.

Oh, Bother

A recent investor sentiment survey[2] by Franklin Templeton Investments polled roughly 20,000 individuals across 19 countries, including more than 1,000 in the U.S. One question asked was whether investors thought the stock market had gone up or down in 2009, 2010 and 2011.

The correct answer, of course, is “up.” The S&P 500 booked annual gains of 27%, 15% and 2% in those respective years. But survey respondents hadn’t gotten the memo. Nearly half or more of investors polled thought the market had been down or flat in those years. Heck, 66% of investors thought that 2009 — the year the S&P sprinted to eye-popping 27% gains as we recovered from a dismal 2008 — had ended in the red.

We could quibble over things like survey methodology or what determines an “investor” (whether it means you have a brokerage account, signed up for your company’s 401k or merely indicated that you might invest down the road) … but no matter what, there’s nothing to like about these results.

In theory, you would think the folks that are actually in the market have, by that fact alone, overcome the headline fear to some extent. Instead, it appears even market participants are still hung over from 2008’s shitshow, their memories clouded by pain.

So are their outlooks. Less than half of respondents expected returns of between 5% and 25% for 2012. Logically, then, more than half were either solidly pessimistic or wildly optimistic.

It’s only a guess, but I’d imagine most of those were in the former camp. Which is good to an extent. Investors hopefully realize stocks aren’t magic wands and that you can’t reasonably expect to double your money in a month, and that the market is irrational and risky. There’s reason to be cautious. However, the S&P 500 gained nearly 13% in 2011, and the index historically has returned 9% to 10% annually (7% after inflation). And yet many might be bracing for returns of less than 5% … even losses?

Interpretation: Many investors still have shell shock from the 2008-09 financial crisis.

Says John Greer, executive vice president of corporate marketing and advertising at Franklin Templeton Investments:

“The market volatility that has persisted since 2008 is keeping many investors on the sidelines, and their ability to view positive equity market performance constructively has been thwarted by the market ups and downs that are at odds with the stability they are seeking. But the reality is that investors who have been waiting for ‘the right time’ to get back into the equity market have been missing out on the market rally we’ve witnessed over the past few years.”

Smell the Roses

Whiffing on a prediction about the future is one thing; not knowing how the market has performed — especially if you’re in it — is another.

Let’s assume, for example, that a huge chunk of the respondents qualified as investors simply because they participate in a 401k plan and do little else with stocks. The fact they didn’t know the market’s overall direction would illustrate an alarming lack of awareness and a harmful set-it-and-forget-it mentality among such investors.

InvestorPlace Editor Jeff Reeves recently nodded to the broader lack of knowledge[3] among such “investors”:

“I sit on the 401(k) board for my small company now and we just had our annual wrap-up meeting. In it, I was amazed to see that the 21 workers under 30 years old at my company collectively have a larger portion of their 401(k) funds in fixed income than any other age bracket. That includes the six participants in the company who are over age 60. And some younger folks have 100% of their investments in low-yield, low-risk bond funds!”

Countless studies confirm our society’s unimpressive levels of basic financial literacy[4] and show that even higher-educated young adults[5] express high levels of confusion when it comes to saving and investing. This Franklin Templeton survey is just another leaf on the pile.

Investors and non-investors alike risk missing out on solid gains because they’re worried about risk in the first place — and many can’t clear that hurdle of doubt because they don’t look past the biggest fear-mongering headlines.

The scariest part is that many retail investors won’t feel comfortable again until the market has been on a run for some time. Only then will those who have just been hoarding money in savings accounts[6] in fear of the market, or those who are investing skeptically or too conservatively, finally begin piling into equities again … likely near a top. (In fact, we’re starting to see that now[7].)

Of course, when a correction (or worse) takes hold, the market will in fact start eating away at investors — most voraciously at those who bought in at the highest point — and the average Joe will run scared again, and most likely sit out the next recovery.

And so the vicious cycle continues.

Source URL: https://investorplace.com/2013/02/the-american-investor-fearful-and-on-tape-delay/

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