Main Street investors change their strategies NEW YORK — Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks. He liquidated 75% of his stock funds. He hasn’t put that cash back in the market. And doesn’t plan to. That emotion-driven decision, made with his wife, Linda, nixed any chance of profiting from the 63% rally that began shortly after selling out in a state of anxiety. Since stocks stopped plunging in March, professional money managers and traders on Wall Street have piled back into the stock market, benefiting from the sharpest rebound in history. But, like Blank, many Main Street investors have yet to regain their stomach for the risky, uncertain and highly volatile world of stocks — leading Andre Weisbrod, CEO of Staar Financial Advisors, to note in a recent report that many buy-and-hold investors have unwittingly switched to a “buy-and-fold” strategy. Individual investors who once embraced risk-taking have adopted a more defensive investing posture, preferring capital preservation over appreciation. Many are trimming the percentage of stocks they own and boosting holdings of safer investments, such as certificates of deposit and money market funds. Harry Nieman, 73, a retiree from Pittsburgh, who lost 25% of his $2 million portfolio in the 2008-09 downdraft, just nibbles on individual stocks now, while stashing most of his cash in CDs and high-yielding online bank accounts. David Moran, 62, kept nearly 100% of his money in stocks during and after the 2000 tech-stock bust but sold a lot of shares before the March 2009 low. “I could never be 100% invested in stocks again,” the Wayland, Mass., technical writer says. Similarly, Glenn Salka, a 57-year-old insurance professional from Fair Lawn, N.J., who near the 2009 market bottom told USA TODAY he was putting 100% of his free cash into “safe stuff,” is still employing the same conservative strategy. Asked why, Salka said, “Fear. Risk. Take your pick.” Buy-and-folders. There are many investors, including those nearing retirement, who just want out of the stock market to reduce anxiety, protect assets they still have and embark on a more risk-averse path. While this group won’t necessarily stay out of the market forever, they are unlikely to make huge bets on stocks. Martin Blank fits the profile. Asked why he won’t ever again bet big on stocks, he said, “I have a basic distrust of the system.” Nieman, the 73-year-old Pittsburgh native and ex-banker, admits that he’s much more “timid” when it comes to stocks. A big reason relates to his age. “I’m more cautious, more vulnerable,” he says. “I am more concerned about preserving my capital. Everyone once believed that investing in stocks can make you a millionaire. But the past few years, we have seen that you can lose everything.” http://www.usatoday.com/money/markets/2010-02-03-realinvestors03_CV_N.htm
Agree that retail investors are one of the best contrarian indicators. Another anecdote, a friend of mine that is a financial advisor had 3-4 clients call him wanting to go all cash within 5 days of the March ‘09 bottom. Beyond the anecdotal, what data could one look at to gauge “retail” sentiment? Investor confidence surveys? Mutual fund flows?
Well, it is not really that surprising those people are more concerned with perservation of capital…just look at their ages. For Mr. Blank, obviously, he didn’t learn anything in his four-decades of “investing experience”.
ws Wrote: ------------------------------------------------------- > Well, it is not really that surprising those > people are more concerned with perservation of > capital…just look at their ages. They obviously weren’t that concerned with “preservation of capital” prior to 2008.
^That is the exact fallacy of retail investor, their risk tolerance changes with market condition (shouldn’t be that case).
XSellSide Wrote: ------------------------------------------------------- > Agree that retail investors are one of the best > contrarian indicators. Another anecdote, a friend > of mine that is a financial advisor had 3-4 > clients call him wanting to go all cash within 5 > days of the March ‘09 bottom. Beyond the > anecdotal, what data could one look at to gauge > “retail” sentiment? Investor confidence surveys? > Mutual fund flows? I had something similar happen. Most of my clients were pretty good about not panicking, but one guy was just going nuts. He kept calling and I kept telling him to stay. His final call was about a week before the bottom. He asked me how many clients had bailed out and I told him zero. His stunned silence on the other end of the phone makes me think he didn’t really believe me. Nevertheless, I got him to hang on. I haven’t heard from him since the turnaround.
ws Wrote: ------------------------------------------------------- > ^That is the exact fallacy of retail investor, > their risk tolerance changes with market condition > (shouldn’t be that case). It’s mostly because retail investors tend to define their risk as shortfall risk, not standard deviation of returns, as our portfolio optimizations generally use. When the market is bad, your shortfall risk *does* increase, and therefore it is not THAT irrational to reduce your exposure. So the real question is to make sure whether there are methods to protect downside. CPPI is one way. Stripping out a minimum for cash is another. Puts and collars are another.
It’s too bad that they seem to be lagging indicators.
My parents liquidated most of their retirement accounts in December 2008. Now my dad says he wants to plow everything back in because he’s earnings less than 1% on his cash balances. I said that the right comparison is not earning 1% over the past year versus earning 70% in the stock market, the right comparison is earning 1% over the next year versus how much you could lose if the market corrects.
ws Wrote: ------------------------------------------------------- > ^That is the exact fallacy of retail investor, > their risk tolerance changes with market condition > (shouldn’t be that case). I disagree, retail investors have a lack of understanding of risk in general. Their risk tolerances stay the same, but their reaction times are correspondingly narrower because they have difficulty absorbing the information that is presented to them. Think of it like this. Consider two people who are risk neutral and have driven the same stretch of highway for 40 years, the first drives down the highway at a normal pace but can only see 100Ft in front of them. If an obstacle is in front of them, say, a deer, they might swerve all over the place and over-correct. Compare to a person who can see 1000ft. They will also swerve to miss the deer, but their swerve will be far more gradual. Arguably, it could be said that the first is driving too fast for his/her risk threshold, but remember this person has been driving the same road for 40 years so they “know” how fast they should be driving.
I had one client call on March 9 last year wanting to go all cash. I urged her to stay put, but she said the “you guys knew this was coming and you think we (I guess she meant investors) we just chumps. Well, I am not going to be a chump any longer.” So I sold everything and she terminated. Who is the chump again, Ms. Client?
goes to eleven Wrote: ------------------------------------------------------- > I had one client call on March 9 last year wanting > to go all cash. I urged her to stay put, but she > said the “you guys knew this was coming and you > think we (I guess she meant investors) we just > chumps. Well, I am not going to be a chump any > longer.” So I sold everything and she terminated. > > > Who is the chump again, Ms. Client? Hahaha. Poor lady. She probably wants to call you back one of these days to get in again, lol.
Hello Mister Walrus Wrote: ------------------------------------------------------- > It’s too bad that they seem to be lagging > indicators. Not entirly, sometimes they serves as leading indicator.
ws Wrote: ------------------------------------------------------- > ^That is the exact fallacy of retail investor, > their risk tolerance changes with market condition > (shouldn’t be that case). Yes it should.
Out of sheer luck I bought into my roth in march 09. That run up has made up some from my roth buy in when the Dow hit 14k.
mwvt9 Wrote: ------------------------------------------------------- > I had something similar happen. Most of my > clients were pretty good about not panicking, but > one guy was just going nuts. He kept calling and > I kept telling him to stay. His final call was > about a week before the bottom. He asked me how > many clients had bailed out and I told him zero. > His stunned silence on the other end of the phone > makes me think he didn’t really believe me. > Nevertheless, I got him to hang on. > > I haven’t heard from him since the turnaround. I have a long list of clients I haven’t heard from since around March 2009, as they were all the oens who rejected any investment recommendations out of hand and insisted on selling up for cash (not 100% cash, but enough).
I had one person who insisted that the world was going to end and we hadn’t seen anything yet. He may still be proven correct… I made him come in and sign a disclosure and then went to cash. That account is still in cash. He now (as in last week) wants to know when to get back in but since he knew when to get out only he can tell me when to get back in. The only one. The best result was one person who move in some money in early april. It was significant enough relative to the size of the port that it made up for all the negative and more. I did have a few clients call and ask me how I was doing and got a few thank you cards. The most signifcant and true value of a financial advisor … Investor behaviour management not investment management.
ws Wrote: ------------------------------------------------------- > ^That is the exact fallacy of retail investor, > their risk tolerance changes with market condition > (shouldn’t be that case). I know that most investors perception of their own tolerance for risk does change with the state of the markets. Its similar in nature to the wealth effect. Most investors do not see risk as volitility, standard deviation, or any other metric. When it comes down to it investors are afraid of the possibility of losing all their money and being poor. There will always be some (probably the majority) that act on emotion either in up or down markets and are not rational at these points in time. The most important times that can have the biggest effect on thier financial life. Because all investors are human and therefore they are and always will be driven by fear and greed. The fear of not having enough money to feed themselves and the greed to have more than their friends and neighbours. This will never change…