What explains the difference between the calm investor and the scared investor?
With the market correction of the last month has come dramatically rising fear levels among individual investors. Case in point, the 5/27 AAII Sentiment Survey reveals that over 50% of individual investors are now bearish. There are only a small number of times in the 23-year history of this particular sentiment survey when there has been more bearish sentiment than now. Surely, a large part of the fear comes from the realization that many have not adequately prepared for the possibility of bear markets. Proper preparation comes from constructing an asset allocation with an appropriate amount of the portfolio dedicated to strategies with strong risk management characteristics. Historically, only about twenty-five percent of 10 percent corrections turn into a 20+ percent bear market so it is quite possible that what we are experiencing now is simply a correction. However, that doesn’t change the fact that investors need to have that strong risk management component of their asset allocation in order to be able to have the intestinal fortitude to stay in the game through all the 10 percent corrections.
Seeking to be adequately prepared for the worst is the very reason that we have included inverse equities in the investment universe for our Global Macro portfolio.
It is with this same logic that Ronald Reagan argued in 1984 for a strong national defense. Consider his famous “Bear in the woods” commercial. Click here to view. The text of the commercial is as follows:
There’s a bear in the woods. For some people, the bear is easy to see. Others don’t see it at all. Some people say the bear is tame. Others say it’s vicious and dangerous. Since no one can really be sure who’s right, isn’t it smart to be as strong as the bear? If there is a bear….
To watch a 15-minute presentation on how we incorporate inverse equities into our Global Macro strategy, click here and then click on “Global Macro Presentation” (Financial Professionals Only.)
What explains the difference between the calm investor and the scared investor? The level of preparation.
Click here to visit www.arrowfunds.com for a prospectus & disclosures. Click here for disclosures from Dorsey Wright Money Management. Past performance is no guarantee of future results.
Posted by Andy Hyer 
