There’s no question that fear moves markets. The devastation in Japan scared many investors not only out of Japanese companies and funds, but also out of the nuclear power industry, insurers, companies with import/export ties to the island nation, and even equity markets on the other side of the planet. Investors don’t like uncertainty and shocks like Japan can trigger bursts of selling. With new reasons to be scared appearing every day, we have to ask: does our fear instinct really protect us?
Fear is big business. Many professional traders and institutions use all sorts of quantitative measures of fear to plot their next trades. The Chicago Board Options Exchange’s VIX, a statistical measure of expected volatility, is considered the benchmark fear index (more about the VIX), but there are plenty of other fear gauges. One clever measure tracks the number of visitors to certain investing websites. More visits mean jittery investors, which means more volatility, which, for some, means it’s time to buy or sell.
Diagram: VIX spikes up on day of Japanese earthquake. Source: Yahoo! Finance
Unsettling events on every channel
Most individual investors ignore the VIX but feel the fear one news report at a time: unrest in Egypt, Tunisia and Lybia, looming default in Greece or Portugal, four or seven dollar gasoline, a stubbornly weak real estate market. It’s easy to find reasons to sell – shaky governments, big recalls, oil spills, high unemployment, terrorist activities, chemical leaks, corruption, natural disasters, invasions, not to mention young Americans in harm’s way in two protracted wars.
Here’s the problem for investors: Bad things happen everywhere, or can happen everywhere. If we sell all holdings where bad things have happened, are happening, or can happen, there’s nothing left to own. Even bonds, gold, and other “safe” investments can be derailed by unexpected events. That leaves passbook savings, mason jars, and mattresses.
Rethinking fear. Many investors see fear as binary – is Japan too risky or not? Stay in or bail? But I believe a more reasonable perspective is this: If I hold a very small portion of my assets – a couple percent, say – in Japan (or Greece, or bank stocks, or real estate) is my financial security in peril if a disaster strikes? Spreading assets across all markets, industries, political systems, and geographies, dilutes the danger associated with any single bad event.
History tells us that markets that tumble after disasters of all kinds often rebound soon thereafter. Investors who bail out after a quick decline may have to buy back in at a higher price. Letting fear dictate investment decisions can be costly. In my view, diversification is a better option. Distributing assets across the market spectrum and around the globe reduces exposure to specific disasters and eases the inclination to flee when bad things do happen.
Is your portfolio fear-proof?
delivered to your inbox
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.