As proof to his statement, “Investors suck wind,” Adam O’Dell at Dent Research likes to show investors as well as investment advisors how the average investor from 1983-2007, during the long-term bull market, earned 5.2% year as the market for the same time returned 9.9%. In fact, thanks to the 2015 Dalbar Study we find, “ For the 20-year period ending in Dec 2014, the average equity (stock) mutual fund investor earned 5.19% annually while the S&P 500 Index returned 9.85%; a gap of 4.66%. The underperformance was even worse for bond funds. The average fixed income (bond) fund investor earned 1.16% during the 20-year period ending Dec 2014 and the Barclays Aggregate Bond Index returned 5.97% annually during the 20-year period; a gap of 4.81%.”
Why is this?
In an effort to explain investor behavior, on August 17, 2016, Harry Dent
wrote, “Most investors need to watch a trend long enough to muster
up the nerve to jump in – that’s a nice way of saying they
get in too late. With corrections every four years on average and substantial
corrections every 10, the first investors hang in too long hoping to get
back to even. Then they finally panic and sell when stocks go down far
enough to push their fear button.”
Dent went on to say, “Fear and greed are the two polar opposites that drive investing. The problem behavioral psychologists have uncovered is that fear trumps greed. Most people need to see at least a potential gain 50% higher than the potential loss for them to go for it. In other words: we value avoiding pain or loss more than getting pleasure or pain. That’s just human nature. This is the same principle that marketers, and I, observe in consumer behavior when adopting new products, technologies or social values.”
This is an S-Curve pattern of how we respond. Most people don’t recognize how these stages can forecast human behavior. Dent put it this way, “The reason the top 0.1% to 1% control 50% of the wealth in this country is that they’re often the first to recognize a new trend, and that is risky. That’s why the 0.1% to 1% get labeled opinion leaders. Then come the influential – more affluent and knowledgeable, between 1% and 10%. It is this sector that decides whether a new product is going to go main-stream or not.” Malcolm Gladwell calls this “the tipping point.” These folks “provide the critical mass that causes the S-Curve acceleration and then, like a herd, the early majority adopt next. After the 50% adoption point the process slows down as finally, the late majority piles in,” according to Harry Dent.
You’re not alone.
Many investors in many different investments, experience something like this. The early-birds get the worms and those late to the party pay higher prices while taking on added risk. When the punchbowl gets removed and the party is winding down, you know who gets out first. And the beat goes on. In fact, investors often wonder, “How can I always be the last person to get in before (that) market fails?” While it might feel that way, no one will tell you that you have a lot of company. You see, many people get in at the end of the party. The reverse is also true. The late-comers are often late to get out, hopeful that they can get back to even by staying in.
Harry Dent said, “But here’s the worst thing about it, and this is downright sinister. The smart money, the big boys, the most adept trader are watching you and all investors. They watch the balance of buy orders and stop losses in order to know when the masses have piled in, like you, and then they short the market. Then they buy when everyone has panicked out. They have both the disposition and tools to do this that you don’t.”
This may be familiar territory.
About a year before the 2008 Presidential election the DOW topped out on Oct. 9, 2007, with a 14,164 close, according to Yahoo Finance. On August 23, 2016, from the same source, the DOW closed at 18,624. “Overall, the news from corporate America is not expected to be good, with analysts estimating S&P 500 company profits will be down 5.2% overall from a year earlier,” Douglas Cote, chief market strategist at Voya Investment Management, told clients in a report at USA Today on July 13, 2016. Cote notes “that in fact if earnings are down as expected, it would be the first time since 2009 we have seen five consecutive quarters of year-over-years earnings declines.” Maybe that helps us to understand why “Billionaires are holding $1.7 trillion in cash,” according to CNBC on August 10, 2016. “Because of what they perceive to be growing risks in the economy and world, the world’s 2,473 billionaires are keeping 22.2% of their total net worth in cash,” submits Wealth-X Billionaire Census. That’s the highest amount since the firm began recording the measure in 2010.
While central bankers from around the world meet in late August in Jackson Hole, investors and the media are on hold hanging on every word. As Rodney Johnson, editor Triple Play Strategy wrote on August 23, 2016, “Bankers have been wrong about, well, everything, and yet they keep pursuing failed strategies and telling us how wonderful things will be at some point in the future. Unfortunately, the future is now, and we don’t have economic growth. Instead we have several asset bubbles on the verge of bursting.” Dear Reader, please answer this question. If the markets take a sharp turn for the worse, what is your strategy to remain resilient? Plan accordingly. While you can.
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