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Wish You Were Here: Spooked Investors Miss Out On $200B Gain
This might be long. On Election Day 2000, on my way to work, at 5AM, in the dark, I was in a car wreck that crippled me. A 19 year old kid fell asleep at the wheel, crossed the line on the highway, and hit me head on. It's spilt milk now for everyone but me. I can't tolerate being in a car in the dark with on-coming headlights. I now know that the safest, defensive driver IS NOT in control. My brain just doesn't work the same as before when I am driving.
I fully understand the feelings of ordinary people about their so-called investments. First, as someone who was employed in a mathematically literate environment that was not professional financiers, I can witness that most small "investors" consider themselves as savers (saving for retirement) and not investors. They were told to set it and forget it and they would end up with far more money in the long run than any "safer" avenue would produce. They were told that houses weren't living quarters; they were investment avenues to ever increasing fortunes. In short, "don't worry be happy".
Then as boomers entered their 50s, tides changed direction. Boom, boom, boom. Bust, bust, bust. After the last bust, data started emerging. Financiers were skimming their fortunes; they could have just bought bonds over those years; no cushy retirement for Joe the Engineer and Suzie the PhD scientist.
Each bust was followed by a bubble of some sort. Gimme one more bubble and I'll learn to play the game. Whoa, that last one was housing; nobody was talking about that one! I can't win.
How do I know this? The engineers, etc. that I worked with thought, incorrectly, that I was the investment queen because I moved my money out of harm’s way just at the right time. (They failed to notice that I had a hard time hitting the "get back in" at the right time.) So they came running when they heard about the banking crisis. Engineers live by a cost/benefit or cost/risk/benefit. They react poorly to risk that, it seems, cannot be assessed but seems to be something other than discussed in the prospectus. (Enter HFT, government bailouts, liquidly traps - oh, just everything that isn't predictable even if the buzz words in the prospectus can be construed to have covered it.)
Good article & provocative. But, remember that while investors were "loosing out" on $200 Billion in stock gains, many were doing quite well riding the bond market higher. Ted appreciates more than most that hindsight is always 20-20. Yes - we'd all like to load up on equities at March '09 prices. But (as I think Anna suggests), the future looks a lot less certain when you're sitting up to your armpits in mud than three years later after a shower and shave.
A related point: As humans we gravitate to what's worked lately. I suppose our caveman ancestors who ventured off in a different direction in search of food probably didn't fare too well. In '08 & early '09 what seemed to work was dumping equities and running to cash or Treasuries. Remember the cry as we bailed out of equities? "Last one out please turn off the lights!" Those slow to bail paid a hefty price. Human nature hasn't changed much since than. So, as interest rates hover near zero, "investors" continue to pile into bond funds driving prices even higher. This won't end well - for most anyway. (Last one out please turn off the lights:-)
Reply to @Anna: Sorry about your misfortune. Recalls being whacked once by a big commercial truck doing 50 MPH while I was waiting for a light to change. Head's still spinning. Not a dime in damages. Minimal care from from our "no fault" insurance. Seems like you need to be dead to collect anything nowadays. Enjoyed your write-up. Some good questions & not easy to answer. Thanks.
Is not some of the bond shift as a result of the ageing of the baby boomers? Possibly in 2000 but certainly in 2008 they learned that a 100% stock allocation might not be best. Naturally they overreacted to some extent. The biggest practical investment/saving problem for that group , which probably includes many reading this is that there is no longer such a thing as a good safe investment.
Comments
I fully understand the feelings of ordinary people about their so-called investments. First, as someone who was employed in a mathematically literate environment that was not professional financiers, I can witness that most small "investors" consider themselves as savers (saving for retirement) and not investors. They were told to set it and forget it and they would end up with far more money in the long run than any "safer" avenue would produce. They were told that houses weren't living quarters; they were investment avenues to ever increasing fortunes. In short, "don't worry be happy".
Then as boomers entered their 50s, tides changed direction. Boom, boom, boom. Bust, bust, bust. After the last bust, data started emerging. Financiers were skimming their fortunes; they could have just bought bonds over those years; no cushy retirement for Joe the Engineer and Suzie the PhD scientist.
Each bust was followed by a bubble of some sort. Gimme one more bubble and I'll learn to play the game. Whoa, that last one was housing; nobody was talking about that one! I can't win.
How do I know this? The engineers, etc. that I worked with thought, incorrectly, that I was the investment queen because I moved my money out of harm’s way just at the right time. (They failed to notice that I had a hard time hitting the "get back in" at the right time.) So they came running when they heard about the banking crisis. Engineers live by a cost/benefit or cost/risk/benefit. They react poorly to risk that, it seems, cannot be assessed but seems to be something other than discussed in the prospectus. (Enter HFT, government bailouts, liquidly traps - oh, just everything that isn't predictable even if the buzz words in the prospectus can be construed to have covered it.)
Remember, they are savers, not investors.
A related point: As humans we gravitate to what's worked lately. I suppose our caveman ancestors who ventured off in a different direction in search of food probably didn't fare too well. In '08 & early '09 what seemed to work was dumping equities and running to cash or Treasuries. Remember the cry as we bailed out of equities? "Last one out please turn off the lights!" Those slow to bail paid a hefty price. Human nature hasn't changed much since than. So, as interest rates hover near zero, "investors" continue to pile into bond funds driving prices even higher. This won't end well - for most anyway. (Last one out please turn off the lights:-)