What Would Goldilocks Do?
March 16, 2012Over the last few months, the stock market has reached levels that we have not seen since before the financial crisis/Great Recession. Companies are reporting good earnings. Interest rates are low. Economists say that we are in a recovery. Yet, so many people I talk to are still very afraid to re-enter the stock market. I see a lot of 401(k) accounts that are still more conservatively allocated than the employee’s goals and age would indicate they could be. My question, which I ask either to myself or to no one in particular, is “Why?” I have my own theories and I talked with a psychologist about what her field might say about this issue.
My theory is that 2008’s market collapse is still fresh in everyone’s memory and people are still processing the fact that through 4 years of working, saving and contributing to their 401(k), they are just now seeing statement balances higher than their October 2007 statements. 4 ½ years later, people feel like they have made ZERO progress toward their long term goals. So, the “wounds” are still fresh. Once burned, twice shy so the saying goes…
Another part of my theory is that it’s impossible to turn on the news without hearing about the debt crisis in Europe, led by the proposals for rescuing Greece and the ensuing riots. This comes not too long after the U.S. had a debt downgrade. People, investors, are concerned about our country’s debt becoming Greece-like if we continue along our current path. Political cynicism, especially in an election year, contributes to the reluctance to take on investment risk by adding more stock funds to the 401(k) mix.
And, even when the news is good…like “the stock market had a great day,” it’s always followed by “it’s the best news since before the financial crisis.” Every good news story references the bad news of the last few years. Even though we are technically in a recovery, it doesn’t feel like it and our friends in the media remind us all too often about how bad it felt to experience the downturn. In between good news stories (with bad news reminders) we see ads for companies selling investments in gold, platinum, and other investments that are “safe” when markets are in disarray. They are using fear as a selling point and it is apparently working. Who doesn’t like a good story about impending doom??? With all of that going on, how can we feel good about the markets and consider investing in stocks again?
I asked a psychologist I know about my theory and she validated a lot of my thoughts and added her own. Catastrophic events, like what we’ve witnessed over the last several years, leave permanent scars. People who lived through the Great Depression were permanently changed. They never felt safe and secure again where money is concerned. This financial crisis left some very clear scars on investors. Everyone that I know knows someone who was unemployed for a substantial time or if they don’t, they know someone who has told them a story about a friend who was/is unemployed. Anyone who had a 401(k) in 2008 saw a big drop in value so they felt personally at risk and felt a sense of personal loss. Every sign of good news is met with a “2008 mentality” where the next move the market makes may be to go straight down like it did in ’08 and early ’09. “If it’s high now, it MUST be about to go down” is a common way to view good news now. As humans, we react based on our own experiences. Given what we have gone through, investor behavior right now is perfectly rational.
So, if it’s rational, what can we learn from all of this? Does it matter? I think it does. In preparing to talk to groups of employees about investment basics, I had to look at some real numbers. From 1926-2011, you can pick any 10 year window that you want and you will find that 95% of the time stocks went up over that 10 year period. When you move the time frame to 20 years, stocks went up 100% of the time. Is there risk in the market? Absolutely! But is there risk in not having stocks in your portfolio? You bet!
When thinking about retirement planning, think about a long time horizon. Your investment horizon isn’t from now until your retirement age. It’s from now until age 100 or 90 or 85 or whatever you want to choose as your life expectancy. I’ve met too many people recently who are in their 30’s and 40’s and who are 100% invested in a stable value portfolio that chugs along, never losing money, at roughly the rate of inflation. I’m not here to tell you to invest 100% of your money in stocks. I’m not here to tell you that 100% in stable value is necessarily a bad thing. (If you’re willing to work longer or save more each year, it may be the ideal investment for you.) My message in all of this is that you should take the time to understand your investment risk profile and build your portfolio accordingly. There are a few risk-appropriate portfolios in the profile to give you a starting point for considering how to allocate your investment dollars.
There’s a lot of wisdom in children’s stories. Goldilocks comes to mind as I’m writing this. Don’t have too much risk in your portfolio. We’ve seen the results of undue risk. Don’t have too little risk either. Pulling out of stocks totally is, to use a term I’ve heard recently, perhaps recklessly conservative. Build a portfolio that’s “just right” for you. That’s what Goldilocks would have done. And, things turned out pretty well for her as I recall.