The Hypocrisy of Today's Investor
As we watch the political debates and read all the press clippings, the word "hypocrisy" seems to be the word of the moment.
What exactly is a hypocrite? A hypocrite is someone pretending to be something he or she is not. I got to thinking about investors and how hypocritical they are today.
On one hand, we project that we are long-term investors who have many years before we either retire or need to live off of our investments. However, on the other hand, we invest as though we are schizophrenics who are fearful of every headline that hits, and as a result are buying and selling on a daily basis.
Researchers at Harvard conducted a study a number of years ago and found that people are 2.5 times more emotionally upset about losing 10% of their money than they are ecstatic about making 10%. This is probably the reason this emotional selling occurs.
Investors are often sold on long-term investment plans from their advisors, and are quoted historical returns over 3-, 7-, and 10-year historical time horizons. However, due to 24/7 access to information via television, radio, Internet and mobile devices, we constantly face emotional battles and second-guess our decisions.
After 25 years of managing money for individuals, I have come to realize that my job has become more and more a job of psychologically analyzing the emotions of my clients and then overlaying a strategy that takes their mindset into consideration.
The two most powerful words in the world are “fear” and “faith” and they both cannot co-exist when it comes to investing. An investor can either have faith in the economic system and try to ignore the barrage of headlines hour-to-hour and day-to-day or they can succumb to the fear that the world is on the brink of collapse.
As advisors and investors we all have a responsibility to become educated and make rational decisions on which word we're going to live by. Will it be faith or fear? Here are some points to help you decide.
FAITH • It is important to recognize that going back in the stock market for the past 200 years there have only been two 10-year rolling time periods where an investor lost money. From 1927 to 1937 an investor lost 1.23% per year and from 1928-1938 an investor lost 2.07%. Even a faithful investor during the Great Depression was not wiped-out. In fact, if they had remained invested for the following five years, they would have even made a substantial amount of money.
FEAR • When investors succumb to fear, they tend to rush into government guaranteed investments. Unfortunately, today the largest percentage of an investor’s money is sitting in either short-term government bonds or money market funds. As Newt Gingrich said, "I am sorry if the facts make you uncomfortable" but here they are:
Had you been an investor in short-term six month CDs or U.S. Treasury bills since 1970 and continued to roll back into that investment every time they matured, after taxes and inflation you would have eroded your purchasing power by 2.07% per year. As a result, $100,000 invested over the past 41 years would have lost a whopping 60% purchasing power. That’s right, after adding the income received for your CD then subtracting taxes paid and subtracting the Bureau of Labor Statistics rate for inflation, you would have lost 60 % purchasing power.
No one can predict with a high degree of confidence what will happen in the short run. However in the long run, if you allow fear to win you over then you will most likely guarantee yourself a substantial loss of purchasing power over the next five years.
I feel very strongly that a high inflation period is about to occur in the United States and worldwide. Learn how to build a constructive portfolio that has growth and income at its core, and focus on your performance versus your investment performance.
Ed Butowsky is an internationally recognized wealth manager. His upcoming book titled "Are You Committing Financial Suicide?" is expected to be released this spring.