A Bloomberg National Poll conducted in March 2014 found that more than three-quarters of Americans say the five-year bull market in US stocks has had little or no effect on their financial well-being.
This is extraordinary as the Standard & Poor’s 500 Index (SPX) has rebounded vigorously since its March 9, 2009 financial crisis low, experiencing a 176% rise. Nonetheless, only 21% of respondents to the Bloomberg poll—one in five—said gains in the markets had made them feel more financially secure. Investing $1,000 in the stock market right now would be a bad idea, according to half of the respondents to a Gallup poll taken at the beginning of the year, when the S&P 500 had recently hit record highs.
This reluctance to invest in stocks comes at a time when low interest rates are being paid on savings and government bonds. The simple fact is that most people cannot save enough for their retirement and other long-term financial goals if the returns on their investments do not significantly exceed the rate of inflation. In the current environment, stocks offer the best option available to most people.
Why are investors discounting five years of evidence of strong growth? Given that these five years follow a period when investors had two of the worst bear markets1. in US history, it seems fairly certain that investors are fearful and are determined to avoid the pain of loss. Many seem to miss the fact that they are racking up huge lost opportunity costs, not to mention those savings lost to inflation.
Being skeptical and adopting a contrarian stance leads you to ask the hard questions that are essential to good decision-making, and corrects against relying too much on intuition. However, remaining resolutely unconvinced, no matter what evidence is produced in support of a position, can work to your disadvantage.
When ideas become entrenched in the public mind, it is very difficult to dislodge them. Consider the frenzy of fear that erupted when a now firmly debunked paper was published in the medical journal Lancet in 1998. The paper, which had no real statistics and was therefore not a study but a recounting of the observations of twelve parents, linked autism in children with the measles, mumps and rubella (MMR) vaccination. It caused so much concern that it led to a flurry of real studies between 1999 and 2012 to combat that concern. In study after study, no link between autism and the MMR vaccine was found.
In 2005, the Cochrane Collaboration (2) did a systematic review of these studies, and in 2012 they updated their work. The research they reviewed included five randomized control trials, one controlled trial, 27 cohort studies, 17 case control studies, five time series trials, one case crossover trial, two ecological studies, and six self-controlled case series studies. All of these together involved about 14.7 million children. In all that data, they could find no link between the MMR vaccine and autism.
Yet parents continue to be fearful. The map below, available in an interactive version on cfr.org, shows shocking outbreaks of vaccine-preventable measles and whooping cough between 2008 - 2014 in the developed world, where vaccines are readily available.
Fear is a powerful emotion that can lead us to ask the right questions. But to let fear close our mind to answers supported by logic and creditable research is folly.
- Bull and bear markets are defined as a 20% or more increase or decrease in the S&P 500 Index.
- The Cochrane Collaboration is an international not-for-profit organisation preparing, maintaining and promoting the accessibility of systematic reviews of the effects of health care.
This article was first published in the July 2014 issue of Sask Business, authored by Daryn Form.
Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada. The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Rates are not guaranteed and are subject to change at any time without notice.