What is investor apathy? It’s investing on the assumption that markets are logical, that significant fluctuation downward is a thing of the past, that the worst cannot happen, and that optimism is justified regardless of fiscal or economic news. It seems to me this is happening a little bit now with investors. It’s as if 2009 never existed.
Recently, I met with someone that is a perfect example of apathetic thinking related to the market. They outlined that volatility is not a problem. They are retired, feel like they won’t be negatively impacted by significant downside volatility, and believe they would act rationally in a downturn and simply buy more out of cash reserves. They maintained they would hold onto this perspective regardless of market conditions, news headlines, and general cries of pain from the markets.
It’s all a question of investor behavior in times of stress. What really matters is whether or not certain investors can behave rationally when markets plummet. History suggests that it is sometimes difficult when the headlines scream that the worst is yet to come and more disaster looms over the horizon. It’s very easy to be rational until the times become uncertain; rational thinking can sometimes be a challenge.
One cannot reduce volatility completely in portfolio strategies; it’s a fact of life when you invest. What you can do is position strategies so the type of risk you are comfortable with is the likely probable outcome during the financial crisis. We do our best to do just that when we invest assets. Our goal is to match portfolios so that the risk and return levels are a comfort level of those we serve combined with requirements of their long-term financial planning strategy. Sometimes this leads us to be more paranoid or uncertain in times of exuberance. Our goal is to be sober in our perspective. This is how we invest assets.
The next time someone tells you that everything is rosy and markets or the economy can’t possibly encounter headwinds, smile at them and give them an understanding look. The simple truth is they are simply not fully recognizing potential outcomes which may include unforeseen negative fluctuation. It’s easy to forget markets can drop when they have rallied for so long.
It’s very easy to be a long-term investor and imagine that you might be calm in market downturns. But I have found that when markets are up everyone seems to be long-term. What really matters is how one behaves when markets turn against expectations. How long-term might one be in that situation? If the answer is not as long-term as when everything rises, adjusting a strategy proactively is a wise course of action.
As I’m sure you know from reading these updates we do tend to worry about a lot of things and it is integrated into how we invest assets. That’s what we do. We try not to get overly optimistic or pessimistic and instead look at the possible outcomes from a probability-based perspective. We then make adjustments in investment strategy based on a careful assessment of the risk versus return of every asset (and every allocation). It’s at the heart of what we do from an investment management perspective and we will continue to adopt the strategy.
If you have any questions about this information, do not hesitate to let us now. We are always here to help.