INVESTING WITH CLARITY™ BLOG
Once Bitten, Twice Shy
September 26, 2013 2:14:00 PM
In the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand. - Benjamin Graham
Of course, this is why many investors hire experts to help them wade through the treacherous waters of investing.
Unfortunately, regardless of one's knowledge or ability to elicit wisdom and guidance to investing, the bottom line is that the emotional roller coaster investors ride during volatile markets has proven to take its toll on even the most stoic investors.
I decided to write this piece in June of this year after many investors, particularly retired and what many would consider to be conservative investors, experienced a large enough rise in interest rates to have a fairly significant short-term impact on their portfolios. An event that has not happened for years in portfolios.
As I have been warning investors over the last few years regarding the risks associated with bonds, I don't believe many people really understand the potential risks with owning bonds today. (If you would like to know my thoughts, please read my previous posts regarding bonds).
This of course, leads us to where we are today. So, why is it that many investors are Once Bitten, Twice Shy?
The answer is simple!
Many may remember the go-go days of the 1990's and the huge rise in the stock market. Most investors can probably remember checking their investments daily to see how much higher their portfolios were moving. Like the real estate bubble we just experienced a few years ago, many investors have a tendency to jump on the bandwagon when it comes to investing in hot sectors.
Chances are, they haven't even remotely thought about any Investment Philosophy, Strategy, the Flexibility or Transparency. They see dollar signs and jump in with both feet, only to eventually realize they made a mistake!
Why does this happen? I believe there are a couple of reasons why this happens. First and most importantly, investors do not have a structured Investment Philosophy or Strategy!
Second, many studies have been done regarding the emotional predisposition to gambling and the emotional toll of a loss investors experience - or perceived loss, meaning it is only a loss if you sell it and sell it for less than you invested.
So, Why Once Bitten, Twice Shy?
After investors chased stock market returns in the 1990's only to see markets pull back over 20% several times, with the crescendo of the financial crisis in 2007-2008, many investors decided they'd had enough of investing in stocks. This is evident in the amount of money still sitting in cash today ($2.659T according to the Investment Company Institute (ICI) as of September 11, 2013) and the historical low interest rates as investors have continued to pour money into bonds.
Investors feel like they have been bitten too many times by the volatility of stocks in the 2000's, making them stay clear of stocks altogether.
Never mind the idea that volatility is what creates the opportunity to buy great companies on sale!
I believe investors are on the verge of getting bitten once again by their expectation of the bonds they own in their portfolio and the perceived lack of isk. Yes, if you hold onto a bond until maturity you will more than likely get your principle back. But, what if you own a bond fund? What if the bonds you own do not mature for 10, 20 or even 30 years? Are you going to be willing to hold onto the bond for the duration in order to get your principle back?
In reality, many investors do not realize the portfolio or volatility risks associated with owning bonds. I have heard numerous investors say things like, I thought bonds were safe and, my portfolio of bonds went down a bunch this month and I can't afford that!
The fact of the matter is that many investors are investing without a structured Investment Philosophy or Strategy. In the meantime, the stock market is hitting all time highs while many investors feel bitten too hard to own stocks again.
Famed investor Benjamin Graham once said, Individuals who cannot master their emotions are ill-suited to profit from the investment process. Mr. Graham knew that having control over your emotions when investing could be the difference between success and failure.
Unfortunately, we are once again in an environment where many investors will feel as though they have been bitten by their allocation to bonds and do not understand or utilize a proven Investment Philosophy and Strategy to accomplish their investment goals.
That is why I believe in Investing With Clarity.
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