Market Euphoria & Investors Behaving Badly

We’ve had countless conversations over the past years with prospective clients who feel they are not as open to making changes when it comes to their finances because the market is up and doing so well. Some of these same folks claim that if given the chance to reposition their assets in guaranteed positions, they would – BUT they want to wait until their accounts return to the prior balances.

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What? Many of these same clients and prospects who promised they’d make a change “if only they could get back to even” after 2008’s losses are suffering from short-term memory loss, unfortunately. It seems we may have recently peaked during the 6th best bull market in US History. If an account has not been indemnified yet, the answer may be to protect the current balance, cut the losses, and move on to guaranteed, greener pastures! It’s time to seriously re-think your current positions because it seems the rollercoaster is about to descend from its crescendo.

At one time or another, everyone has heard the Wall Street mantra, “Buy Low and Sell High.” Unfortunately for the average investor, this rarely happens with success. Money News highlights this phenomenon, and the data is backed up by Dalbar who states that, “… Over the last 20 years that investors in U.S. stock mutual funds earned an average annualized return of 4.25 percent during that period, while the Standard & Poor’s 500 stock index generated an 8.21 percent return.”

Translation: Retail investors, “Move their money in and out of the market at the wrong times,” Dalbar says. “They get excited or they panic, and they hurt themselves.”

On the Market rollercoaster, there are highs of optimism, excitement and thrill where the market has already peaked and institutional managers and inside professionals have already sold off for profits and repositioned for new opportunities; unfortunately at these points is when the retail investing public (average investor) normally enters the market. This is not only disastrous and counterintuitive, but it’s also unfortunately human nature. We tend to make investment decisions when we “feel” good. This mentality is counterproductive to the buying low and selling high strategy. As humans, we are mentally programed incorrectly for market success, and without removing the fear of loss or the need for greed, we tend to run the uphill battle against Wall Street.

Now for those investors who are already deep into their positions, they tend to stay invested at the points of optimism, excitement and thrill, when in fact they should be selling like Wall Street Wealth Managers.

On the opposite end of the spectrum, anxiety, denial, fear and desperation are times when retail investor’s account values are in decline and the investor refuses to see they are in free fall. Failing to have an exit strategy is analogous to diving out of an airplane while trying to put your parachute on. At that point, everyone knows what he or she should have done with some prior planning and preparation prior to free fall.  It’s not the fall that kills; it’s the sudden stop!

Investors normally hear statements from their brokers such as, “It will come back. Stay the course,” “Don’t sell now – you’ll create a real loss,” “It’s just temporary,” etc… For those of you fortunate enough to have time on your side and don’t need to use your assets in the immediate future, you may have an opportunity for those funds to recuperate and rebound, such as those accounts which we refer to as the “Lost Decade,” or should  we say the lost “Baker’s Dozen.”

Many investors who lost money in 2000 are finally seeing their accounts rebounding back to those original values after 12-13 years of sitting frantically in anxiety and through two major market corrections. They are now tiptoeing through the 6th best bull-market run in US history. Hey, let’s look at the good news…     you’re finally back to square one. The bad news, unfortunately, is that you just lost more than a decade of your life, and financially factoring in the lost opportunity costs and inflation still places those accounts at a net-negative balance.