One of the big stories in today’s news cycle is a major poll conducted by AP and CNBC which purports to show that a majority of US stock investors are wary of the stock market, market participants, and government regulators. In short, all market participants get a bad rap, which is why Joe Investor has been piling into bonds over the last two to three years.
The poll focused on stock, mutual fund, and bond owners in the US, and not surprisingly, “more than 60 percent of those surveyed said they had paid attention to news reports about swings the stock market.” What could this lead to?
Perhaps as a result, investors have been moving their money away from stocks and into bonds, which are generally more conservative investments and less volatile.
One participant interviewed explained, “It’s just a gut feeling.” And so it goes! The poll data highlights a broad market sentiment dominated by fear, which we’ve gone over in our own Dorsey Wright Client Sentiment Survey series.
So, we have a situation where regular investors are reading the news and jumping ship into the perceived safety of bonds. However, by digging deeper into this poll we’ll see a more complicated situation: a confused investor who is out of touch with the facts, and acting upon conflicting impulses and advice.
Let’s get to the meat.
Nearly 80 percent of those surveyed said the best way to make money in the stock market is to buy stocks and hold them for a long time before selling.
Eighty percent of regular market participants *know* that the best bet is to sit tight…yet everyone is piling into bonds based on gut feelings! I’ve written about this phenomenon before – when someone does something that they know is bad for them, yet continue to do so. What’s even more problematic is that the mere act of informing someone that their behavior has negative consequences can lead to reinforcement of the offending behavior. It’s a dirty game!
What are the big takeaways of the poll results?
- Average investors are extremely distrustful of the market and market participants (including regulators)
- Net worth plays a big role in shaping an individual’s market perception
- Emotions trump data
It’s the last point that needs to be hammered home again and again. On the one hand, investors know the facts – they know emotional decisions hurt long-term performance because 80% have accepted the data. And on the other hand, these same investors keep making the same mistake over and over again. The bond flows paint a gruesome picture: investors are afraid of losing their money and are jumping into bonds as a result of how they feel (fear and pain), not what the data shows (don’t make decisions based on fear and pain).
It’s up to you, the client’s financial advisor, to remain above the fray and to keep your client’s emotional proclivities in check. Good luck!
