Investors today have a heightened awareness of the risks that come with investing in stocks, having lost money, on average, over the last ten years. This has led many investors to turn cautious, even though stock prices are lower and corporate earnings are much higher than they were ten years ago. Indeed, during 2009, even as the S & P 500 rose by 26%, investors in mutual funds reduced their net holdings in stock funds, while adding to investments in bond funds.
Risk is always with us in stock investing. But, what has increased during the current period of economic turmoil is not actual risk, but investors’ perception of risk. The risk was always there, we just didn’t know it.
In 2007, before the onset of the financial crisis, investors were complacent. Having been shaken by the severe recession and the collapse of Lehman Bros., Fannie Mae (FNM), Freddie Mac (FRE), AIG (NYSE:AIG
), Chrysler and General Motors (OTC:MTLQQ
), many investors remain frozen by the danger of a descent into a double dip recession.
We are bombarded with fears that the nascent economic recovery will peter out as soon as government stimulus spending fades away, or when the commercial real estate mortgage market melts down, or when government borrowing crowds out private capital, or when the dollar collapses, or when the house buying credit expires, or when taxes and interest rates have to be raised. Some of these worries may be valid to some degree, but what is clear is that investors have a sharply heightened awareness of what could go wrong with the economy. We are like characters in a nightmare walking through Times Square wearing earphones that magnify the volume of sound that we hear by a factor of ten.
When was it more risky to fly on commercial airlines: before 9/11/2001, or after? Right before 9/11 the risk was the highest ever - we just didn’t know it.
When was it more risky to own a Toyota Camry - in early 2009, before we knew about potential acceleration problems or now as they are fixing them? Obviously, the risk was higher last year, we just didn’t know it. But, now consumers are leery of buying Toyotas.
When was it more risky to buy stocks - in 2007, when investors were complacent, even confident, or in 2009 when, in the midst of economic trauma, both stock prices and the economy turned upward?
Nobody knows how stock prices will perform in the near future. Risks are always there. But investing in stocks today is no more risky than it was before the financial crisis. And stock prices are substantially lower. Indeed, investors’ heightened perception of risk has provided us with a buying opportunity.
If history is any guide, many of those too nervous to buy stocks will wait until the economic recovery has taken hold and growth in employment spreads confidence throughout the land. Many such cautious investors then will buy stocks because their perception of risk will have declined, even though actual risks may not be lower, at all. When they finally do come late to the party, they will be paying significantly higher prices for their stocks and we will be closer in time to the next bear market and recession. Landy Investment Management LLC remains bullish and our clients are nearly fully invested in a diversified portfolio of stocks. Disclosure: