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.