Rocket science is intellectually demanding. Investing is emotionally demanding.
This point must be emphasized because of the constant refrain that "investing is not rocket science" - just learn it and do it and don't even think about getting any help for it, we are told.
I don't advocate that every investor get a financial advisor. In fact, I offer some a metaphor below that I think may help people conceptualize a fundamental skill they need to manage their investments independently. But first I want to avail myself of two superb articles on today's SA, one by Cullen Roche and the other by Lance Roberts, which I consider very helpful to DIY investors who say that investing is not rocket science. The point is to add to their intellectual capital about wherein exactly the difficulty lies.
Cullen Roche discusses the paralysis of investors - worldwide! - who are sitting on piles of cash because they panicked in the last market crash (this he infers from his own experience as an advisor hearing from such investors). U.S. investors, according to data from BlackRock that he cites, are 65% in cash. Roche says that he hears weekly from investors who took flight in the 2008 meltdown, want to get back in, but fear that it is now too risky to do so because of high P/Es and rising bond yields.
Lance Roberts has also heard plenty of investors affirm their resolution to tough out difficult markets. But he cites data from Ned Davis Research indicating that toughing it out is not what most investors actually do. I quote:
Every time the market declines more than 10% (and "real" bear markets don't even officially begin until the decline is 20%), mutual funds experience net outflows of investor money…
Most bear markets last for months (the norm), or even years (both the 1929 and 1966 bear markets), and one can see how the torture of losing money week after week, month after month, would wear down even the most determined "buy and hold" investor. This is also why the next true "bear market" will demolish the "RoboAdvisor" industry …"
But the average investor's pain threshold is a lot lower than that. The research shows that it doesn't matter if the bear market lasts less than 3 months (like the 1990 bear) or less than 3 days (like the 1987 bear). People will still sell out, usually at the very bottom, and almost always at a loss."
I quoted Roberts at length because these are all superb points. But I will emphasize just one of those points to encourage DIY investors to tough it out. (I truly recognize that an advisor is not for everybody!) This season we're seeing blizzards and rainfall wallop most of the nation. The thermostat has even dipped into the 50s in L.A. For many people, especially on the East Coast and Midwest, the unrelieved daily cold gets to them. To paraphrase Roberts, one can see how the torture of cold weather week after week, month after month, would wear down even the most determined New Englander. And yet, because no one has the illusion of control when it comes to natural forces like the weather, most people who don't like the cold understand that spring will come and they will thaw off. Sure, some will escape to Florida - if their life situation permits - but most people understand that they just need to tough it out for a season and await better times.
And so it is with investing. The danger lies in the combination of extreme discomfort, a sense that trends will persist indefinitely because of all the gloom-and-doom headlines they read, plus the ability to push a few buttons and sell. Investors who are truly prepared can weather investing's sporadic and sudden storms. But rocket science (or not being rocket science) has nothing to do with it.
Please share your thoughts in our comments section. And here are today's advisor-related links:
- BlackRock: 4 tips to savor retirement.
- And a fifth tip from Mitch Anthony: Retirement should include philanthropy.
- Bill Gross: If the 10-year Treasury moves past 2.6%, "a secular bear bond market has begun."
- Kevin Wilson examines why George W. Bush's tax cuts failed.
- Ian Bezek: If you want overseas exposure, don't count on U.S. multinationals.
- For more content geared to FAs, click here.