The Cost of Negativity
As I was listening to the radio while driving home last week I heard relentless negativity toward the economy and stock market. Advertisement after advertisement talked about the ‘wall street casino’ and how the Federal Reserve has ‘fumbled the ball’ as the economy falters. There is a general perception that the stock market is doing horribly; a perception driven not by data but by simple repetition. The problem is that while the narrative is popular, it is simply untrue. Despite what you may have heard, the S&P 500 has returned over 8% so far this year, over 30% in the last 3 years, and over 100% in the past 5 years. These are not just random facts. Investing based on some false perception can damage your returns and permanently harm your portfolio. Beware, there is a cost to negativity.
The Cost of ‘Alternative Investments’
Somehow, advisors who are critical of the stock market appear to be more believable. However, advisors are often being critical of the stock market in order to ‘sell’ some ‘alternative’ to the stock market. How many times have you heard the sales pitch, “the stock market is ready for a fall but I can protect you with… an annuity, or an investment in real estate, or an investment in gold, or a sure-fire trading strategy.” The fact is that fear sells and moves people to action like nothing else. Notice that there is very little discussion of the merits of the ‘alternative,’ merely a criticism of the stock market. Be wary because there is a cost to alternative investments. The truth is that these alternatives are often riddled with excessive fees and risks that dwarf what investors face in the stock market.
Take for instance the popular non-traded Real Estate Investment Trust. These investments are being pushed as a ‘safe’ alternative to stocks, but that is hardly the case. As we have written in the past, the high fees, high debt levels, lack of marketability and other risks cause these investments to be a wolf in sheep’s clothing. Be wary of trying to shield a portfolio from stock market exposure only to jump into something that could be even worse. Or consider the popular variable annuity, which can protect investors from a market drop, but also damage returns with fees running at 4% or more. While there are pros and cons to all investments there is a cost to these types of alternatives, typically in the form of higher fees, and that is why they are sold.
The Cost of Lost Profits
The negativity in the news has led many investors to worry about the next stock market drop. I know many investors who ‘felt’ that the stock market was ready for a fall this year and moved their money out of the stock market and have been sitting in cash or mostly in cash all year. Those people just experienced the cost of lost profits - 8% in lost profits as the stock market hit new highs. Others swore off the stock market in the depths of the 2008 crash. Those people lost out on the ability to triple their money. Somehow these losses are more forgivable than a drop in their portfolios, but they have very real implications for the future. Lost profits can mean that investors fail to retire, or worse, fail to have enough money during retirement. Lost profits can mean that the house must be sold, or the health bills don’t get paid, or the kids can’t go to college. These are very real losses indeed.
We have been saying all year that, while everything is not great, there are still good signs in the economy and there is a risk to being out of the market. Now those investors who sat in cash must find a way to make up 8% return. Sure the market may fall and give a buy point, but it may not. More importantly, they are now faced with taking more risk in the future to make up for the losses. If investors fail to accurately predict the increase this year, why do they think they can time the next drop.
How to Invest?
It is easy to be critical, but a better approach is to be skeptical. Investors should be skeptical – of everything. Being a skeptic means that investors should base their decisions on sound data, not hype. The data suggests that the stock market should not be avoided, but should be approached with caution. Yes, there are significant risks in the stock market, risks that should be taken seriously and measured carefully. However, buying into an ‘anything but the stock market’ mentality can lead an investor to make mistakes by seeking alternatives with high fees or sitting in cash while the market rallies – both errors that can cost an investor. If you are worried and would like a disciplined approach to investing without the hype the please give us a call, we would be happy to help.
"S&P 500" S&P Dow Jones Indices. August 20, 2016. http://us.spindices.com/indices/equity/sp-500.