Sunday, December 28, 2008

Thoughts on Investor Complacence

I've talked with a good number of people about their personal investments; most have been significantly impacted by the simultaneous drop in housing, stock, and bond prices over the past year. Almost to a person, their investment strategy has been to stick with their investment mix, convinced that "things will eventually turn around".

The key word, of course, is "eventually". Stocks didn't overtake their 1929 highs for decades; by 1982, stocks--on an inflation-adjusted basis--had lost well over half their value relative to 1966. Japan's Nikkei stock average, depicted above in the chart from Decision Point, has made recent lows, having lost about 75% of its value since 1989. That's going on 20 years of severely negative returns.

In all of those markets, there were solid countertrend rallies offering attractive opportunities for traders and active investors. Among those investing over the long haul, however, I detect a shocking complacence and a complete absence of planning for worst case scenarios. Although Japan's long-term experience with going into profound debt in the name of quantitative easing has not been a formula for favorable stock market returns, U.S. investors seem singularly unconcerned about a replay.


Kevin said...

So what's the alternative to buy-and-hold? (If I hear one more Vanguard radio spot warning me that market timing is a loser's game, I'm going to scream!)

Maybe Congress should pass a law that stocks, bonds, and real estate can only go up.


Mark Wolfinger said...

You can't be surprised by the complacency. The talking heads on TV, the financial journalists, professional advice givers who collect fees - they all send the same messages:

a) buy and hold and all will be well

b) there has never been a 20-year period in which the market was lower at the end than the beginning (they choose to ignore inflation)

c) don't panic

d) diversify

It's all the public hears and it's all they know. Sure, many panic early and others panic late. But they expect to be saved.

I don't understand why high school students are not forced to become financially literate. But, the probem with that idea is that there are too few people qualified to teach such courses.

Best for 2009.

Jaroslaw said...

Great point, dr Steenbarger!

Hardly anybody tends to admit that we are at the beginning of a multi-year downtrend.
As it is once in the lifetime event we will only recognize the extent of damage at the end.

We could still play short to medium time tredns as sharp corrections in the bear market are too dangerous to stay short all the time.


Brett Steenbarger, Ph.D. said...

Thanks for the comments. Very few investors seem capable of taking's one area where having a trading background has aided my investing--


Marc said...

I have to disagree with the complacency argument. I'm reading nothing but doom and gloom for the economy and the job market. I'm seeing my employees taking out 401k loans or moving them into money market funds. In a nutshell, there is complacency but there is also a huge amount of fear out there.

Does it really matter if some people stick to their long term investments? The level of cash in managed funds is at a very high level so there is fuel for the upside. Anyway, who can blame the average person for staying long. That's been the mantra for the last couple of decades.

The one thing that's being ignored is that the largest investment for most people is their home. Despite the latest drop, the family home has still been a great investment.

What I'm getting at is the market is driven by the emotions of people and not the other way around. Until people en mass decide that the stock market and the family home are bad places to put their money, we will continue to see them as "investors".