109 The Financial Crisis is Not a Distant Memory

The financial crisis of 2008 was over nearly five years ago but recent research shows us that investors are still having a really hard time finding the balance between performance and safety.

Today we have a barrage of statistics showing us that investors are still not quite sure they should be back in the stock market or investing at all following the financial crisis back in 2008. As you’ll see the numbers from the two surveys are bit disconnected from reality, however, that’s pretty consistent with our anecdotal evidence of investor psychology over the last few years.

SadnessI guess you could say this episode is a little reminiscent of Eyore if you remember that love curmudgeon of a character from Winnie the Pooh. We felt like we were just delivering bad news after going through the information for the show.

We've seen some statistics recently that are derived from research done by compiling surveys conducted by Natixis and Gallup that were charged with collecting data about investor sentiment.

According to the survey, which set out to gauge some very broad feelings from investors about how they feel regarding investment objectives—what they identify as success or failure, how they feel regarding what sort of return they need to achieve to get where they need to be etc.

The enlightening part about both surveys is that both the Gallup and Natixis data arrived at a very similar result.

The two individuals surveys seem to validate one another quite well.

How Do People Feel About Investing Post Financial Crisis?

The big takeaway from both surveys is that there is this weird back-and-forth kind of tug-of-war that is taking place among investors. It’s clearly an intense emotional struggle that people are dealing with and it’s no great surprise, we’re all a bit sensitive when it comes to our money.

The emotional tug-of-war has safety of principal on one side and expected returns on the other. Why the battle?

It’s hard to say definitively but we do have a theory based on our daily conversations with people regarding their finances.

People are really torn—they the impression of the financial crisis in 2008 is deeply burned into their psyche and despite the fact that we have had a sold five years of outstanding market returns since 2008 there lingers a reminder of reality. In the back of our minds we have this consideration that we could have a big correction at any moment.

And if we do have a major correction, all of the gain that I’ve gotten in the past five years is going to vanish into thin air…or at least some significant portion of that gain.

The most fascinating observation of both surveys is that roughly 74% of investors stated that they would take safety over performance.

That’s a much larger number than I would have anticipated.

In other words, these investors are saying yes I will choose “preservation of my principal” at the cost of higher expected returns. I will accept that trade-off .

The irony to me of course is that I would venture to say six or seven years ago we would have gotten a totally different response from a majority of investors. Do remember how enthusiastic we all were back 2006 and the early part of 2007? I can remember it vividly.

Consider how different a response this survey would’ve gotten in 1999 when the dotcom boom was in full swing. Back then we were all was convinced the stock market only moved in one direction–up. Remember that?

You could've gotten a much similar response in the mid to thousands in regards to real estate. Remember when all the pundits on TV told people that real estate only went up? Our entire financial system was built on that foundation of sand.

Damaged Flooded House Sinking in Flood Inundation

Fortunately I think that most people have now decided that it’s a fairly high-risk strategy to take out three mortgages to buy houses, pull out the cash and invest the money in the market.

74% Prefer Safety Over Potential for Higher Gains

So what do we make of the fact that 74% of people would prefer safety of principal over higher games?

This speaks directly to the apprehension that people have.

There's typically some length of time that passes after an event like the financial crisis in 2008 were people tend to get over things and move on. But this time it just doesn’t seem to be happening that way.

We've had some great investment returns since the bottom was reached in the financial crisis and it just doesn't seem like people have been able to move forward and leave the financial crisis in the past.

After the market crash in the early 2000s people seemed to move on really quickly and jumped back into the market after a relatively short period of time. Certainly by 2004-2005 things were charging on full steam ahead. Of course much of that charge was fueled by easy mortgage money (none of us knew it at the time) but this time it seems that the landscape has completely changed.

I feel like people are just a bit more cynical now and a lot less trusting of the system and the markets in general.

Even in our world of dealing with insurance products there are a lot of apprehension involved around people losing money. It seems that we spend an inordinate amount of time discussing the guarantees of life insurance policies.

Guarantees are nice and intended to provide safety net should things go horribly wrong.

But we feel like the likelihood that the guarantee in a life insurance contract actually plays out is really not worth talking about at length.

However we can understand that it is a frightening proposition to have the ability to be up 30% and then to watch it all fade away in a very short period of time. Even for us, when we know logically to expect these sorts of fluctuations it can be a somewhat scary proposition.

To think that there’s no way to ever really lock in those gains so that I don’t slide backwards. Sure, you can sell and take your money off the table but what are your alternatives?

When you're looking back over a five-year period and you have a substantial financial gain is when your fear reaches its pinnacle. Because you realize that the past five years were phenomenally good (freakishly good in some cases) and the next five years likely won’t be as outstanding based on probabilities alone.

And I think that with the market performance since the end of the financial crisis being so great, that's the psychology of people right now. They’re thinking—“I’ve seen this before and it doesn’t end well for me”

When you’ve had a period of years that you can look back and see your compound annual growth rate at 8 or 10% it's really hard to imagine what would happen if you went backwards. I think it’s great and I’m excited to have such phenomenal results but I know intuitively that is not sustainable. Then I become slightly obsessed with “what do I do to make sure that I don’t lose all that I’ve gained?”
It’s so easy to say I'll just take all the money off the table to lock in those gains. And in some cases that’s possible and probably a good thing to do but…

What if all that money is tied up inside of a 401(k) plan that doesn’t have options outside of the market other than a money market account? So many investors have a large portion of their investable net worth tied up inside of their company sponsored retirement plan.

It leads you into a scary circular logic in your mind.

How Are People Defining Investment Success since the Financial Crisis?

Natixis asked the survey respondents–what was your plan-B? What would you do if your investment strategy did not yield the results that you hoped it would? And they asked this question specifically regarding the issue of retirement.

31% of respondents said they would just work longer which seems perfectly rational right?

25% said that would rely on government assistance that seems a little scary and the next largest segment at 21% said that they would rely on their spouse or significant other to supply income for them to be able to retire.

Working longer seems like a decent plan as we think that in many cases people retire way too early.

However, the plan to rely on government assistance seems a bit misguided. We all know that relying on Social Security and other types of government assistance for a primary source of retirement income is not such a great plan.

As for the, “I’ll rely on my spouse or significant other” response, we think that’s a shoulder shrug, catch-all, I don’t see any other suitable answers here sort of response. Sure, I’ll pick that one.

How People Define Investment Success

The number one answer in the United States was being on track to reach financial goals. Now, that one is very vague and hard to measure as it’s somewhat tricky to say that you either succeeded or you didn’t succeed as each person will define those things differently.

In our business, we have come to the realization that most people don't have specific financial goals. It's very rare to encounter someone who has numbers on paper or dates on paper that are specific with a plan to reach those specific goals that they are adhering to with great focus.

The number two and number three answers were somewhat shocking. The number two answer (in order of popularity) was—“only making gains and no losses”.

Number three was “not losing principal”.

So that means a large number of people want something that doesn't exist in the stock market and for the rest of them “as long as we don't lose money were good to go”.

Number four defined investment success as outperforming the market and that was only 15% of the total respondents. It begs the question, why be invested in the market at all? If you only want gains and no losses there certainly ways to do that without being fully invested in the stock market.

That means that according to this survey, over 35% of the people who are invested in the market shouldn't be because they either are more concerned with the safety of their principal or they would like to only go up about going down neither of which they can do if they are invested in the stock market.

Anybody seeing the disconnect here?

The top four answers do not require you to be in the stock market at all. And there are certainly ways for you to reach retirement goals without being invested in the market. The financial crisis seems to have had a very profound impact on the psyche of people all over the world.


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