Investor Anxieties

Earlier this week I was asked to participate in a discussion on CNBC regarding a survey performed by the people at The survey, which is called the Financial Security Index, is a monthly poll that attempts to gauge retail investor appetite for stocks. Borrowing straight from an article by Allison Ross on the web site: “The index, based on telephone interviews with over 1,000 people in the US, found that nearly three-quarters of consumers would rather settle for low yields in liquid accounts than venture into the stock market.” Now, I’m sure consumers were aware that there remains a good deal of skepticism following the massive sell-offs of 2000 and 2008. But three-quarters of them? Even after the huge gains we’ve seen since the market lows of March, 2009? Even with the miserably low rates of interest paid on bank deposits and money market funds?

Data like this about investor skepticism will generally elicit a familiar response from most professional investors. They will say that such a large number of non-believers means that the bull market still has a long way to run. Bull markets end, they say, when there is a near-unanimous belief that stocks are going higher. Well, I certainly don’t have the answer to how long this current bull market will last. And while I’m the farthest thing from a market timer, I would like to share a few thoughts that came to mind as I was pondering the results of this survey.

First of all, staying invested in stocks does not mean you have to own Tesla or Facebook or Netflix. If you have been following our Weekly Commentaries, you know that we have been defensive, but we have also remained fully invested. This means that we seek companies with fortress balance sheets, strong cash flow, seasoned management teams, excellent track records, and competitive dividends. These attributes generally serve to limit downside risk in the event of a market downturn as a “flight-to-quality” mentality takes over. Sure, the upside might not be as great over the near term. But buying quality companies can certainly go a long way in managing risk.

I agree with the sentiment that folks could be jeopardizing their retirements by avoiding the stock market altogether. In fact, we have warned for a long time that consumers are ill-prepared for retirement and need to save more for retirement by investing in stocks. Our anxiety over retirement savings is compounded now that the consumer has started saving less again. In the early stages of the financial crisis, the consumer began saving a higher amount of his/her income. This was a natural response to a suddenly uncertain financial future. Now, though, savings rates are starting to drift lower again. This is obviously a near-term positive for the economy, but it is also a longer-term negative for the financial health of the consumer. How will individuals reach their retirement goals if they both refuse to save and refuse to invest in an asset class that has proven to provide superior long-term returns?

One last thought. Perversely, the consumer’s continued reluctance to buy stocks as the market soars ever higher could serve as a stabilizing mechanism for the capital markets in the future (barring any unforeseen shocks). Those who have missed out on this huge stock rally since the early 2009 lows may be more inclined to support stock prices in the event of a correction. In other words, some investors are simply waiting for a better entry point (that never seems to come!). And secondly, those individuals who are still reluctant to buy stocks may serve to limit the magnitude of future interest rate increases by purchasing bonds if/when interest rates start to increase. Lower interest rates are generally positive for stocks as well.

It goes without saying that there are many, many people that are looking for a better return on their money than the 5 basis points they are getting on their money market funds. These folks are feeling dumb because they missed such a huge move, and now they are forced to accept terrible returns on their money. We suggest that those late to the party may be inclined to change their mind if the proper carrots are dangled in front of them. After all, stocks are not going anywhere. They will still be the one major asset class that offers the best returns over long periods of time so that individuals can meet their retirement objectives.



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