Fear and Loathing in Equities

Posted in: Economics, General, Stock Market, Thought of the Week

CreditDonkey is a financial education website that recently conducted a survey questioning over 1,200 Americans about what scares them the most. At the top of the list was investing in the stock market, with 37% of the respondents agreeing that they feared equities.

For scale, the survey also indicated that 46% also fear death and 49% are afraid of heights. Apparently, more than one in three Americans consider investing in equities to be only slightly safer than using dental floss to bungee jump off the Golden Gate Bridge.

The reasons for investor fears are not overly surprising, as respondents cited the perceived high risks involved. Common responses included, “I’m afraid of losing money,” and, “I don’t have time to watch the market.” Others stated that they don’t trust someone else making investment decisions for them.

Two additional less sanguine results are that 73% consider investing in the stock market to be a form of gambling, and 31% believe that the stock market is rigged.

Let’s address these concerns one-by-one. First, in no way whatsoever is the stock market rigged. The U.S. equity market is much too large to be manipulated to the point where only a few profit on a consistent basis. That’s not to say that it’s immune to illegal activity, because it does quite often occur. However, it’s usually so small or short-term focused that a long-term investor would not be impacted.

Second, the stock market is absolutely used as a gambling medium by day traders, because there is simply no way that anyone can predict the short-term movements in markets or single stocks on a consistent basis.

However, those investors who follow the fundamentals of companies and ignore the day-to-day market movements are not gambling. Rather, they are creating an investment thesis and constantly observing its progress as it plays out. The difference may appear to be subtle but rest assured the two strategies couldn’t be more different.

In regards to the “fear” component of the market, let’s compare the return on the S&P 500 to gold from 1980 through 2014. The return on gold has been 128% over the 34 year period, and the S&P 500 return is over 1,800%. Even through the madness of the dot-com bubble and the financial crisis, investors have realized a higher average annual return in stocks than in gold, bonds, and most other forms of investments.

However, building profitable stock portfolios is not easy, and success typically requires a tremendous amount of education, skill, and experience. Those who lack these traits will most likely fall victim to one or all of the following: (1) fear, (2) panic, and/or (3) greed.

Simply put, the emotions that caused those respondents to say that they feared the stock market are likely the same reasons they have lost money in the past.

There’s no question that risks exist in the stock market. The U.S. will fall into another recession at some point in the future, and there will most certainly be another Enron and/or Bernie Madoff. These events will catch headlines and boost financial news network ratings just as they have in the past, but they will most likely be just as temporary as those that have come to pass.

The bottom line is that emotions are the reason investors lose money, and a well-diversified portfolio that is managed for the long run by a professional is the best recommendation to help investors overcome their fear of the stock market.

Read this week’s Thought of the Week to learn more about fear in the market.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.