Once upon a time long long ago the average person would work 30 years for the same company, retire at 65 with a gold watch and a pension. Life was grand and the “average investor” was not worried about VIX readings, QE 1,2,3, Apple Earnings, High Frequency Trading, or any other financial buzz word for that matter. But all of a sudden pension obligations became to hot to handle and BOOM retirement saving is now up to you the individual.
Beginning in the 80′s employers left the margin squeezing pension programs on the shelf and began introducing the much discussed 401(k) plan. The advent of the 401(K) plan has turned the “average investor” into a willing or “unwilling market participant. All of a sudden the stock market was no longer just for the wealthy, the wicked or the gambler, now the market is for everyone. Over time the shift from an entitlement society to a self-sufficient society has brought millions of new market participants and a sea change in the psychology of the investor.
There are no shortage of theories, research papers, and books on investor psychology, many have tried to pin down what causes investors to react and how you as an advisor, trader, broker, or asset manager can capitalize on it. Whether its monthly market sentiment charts, VIX readings, or surveys there is a billion dollar industry trying to figure out how the investor feels. In my opinion trying to quantify how the investor feels is fools gold. It’s not hard to tell that the world is at a cross roads. Between the crisis of 2008 here in the States or the current situation in the Euro Zone there has not much for investors to feel good about the last few years.
Many like to say that the last 10 years has been a lost decade in the market. The .SPX and the NASDAQ are about where they were at the turn of the century. In between 2000 and 2011 the market has been a cyclical bear market. Too often the average investor will react to the news they here on Fox or CNBC, they don’t see a distinction between an investor or trader. When the market is driven down 3% in a day by traders many average market participants feel like they must get out before it’s too late and they lose everything.When the market is driven up 3% by the same traders the average investor feels like they have to jump into the pool head first or they will miss their opportunity to become rich. This is obviously a flawed logic.
Stock market psychology to me is not an acute science, quite honestly if you read the news headlines on any given day you can get a sense of the average investor feels. The biggest driver of this psychology; fear. Am I going to retire? Will I survive my retirement? How am I going to pay for college? These types of questions are what keep the average investor up at night. These questions are what drives an investor to buy and sell with the market. These are the types of questions that cause an investor to be a failed investor or an investor no more. Ideally investors would not have an emotional, visceral reaction when dealing with their investments. Unfortunately this is not the case. Investors who lost 40% of their portfolio’s are fearful that it will happen again. Investors who timed it perfect and doubled their money are convinced it will happen again as well, it’s all a matter of perspective.
When it’s all said and done fear and greed are the biggest drivers of the market for the average investor. Will this change? Probably not, all we can do is sit back and watch as generations of investors continue to make the same mistakes time and time again. Everytime the market corrects or the economy sputters you hear the words “this time its different”. Bullshit, the only thing that is different are the characters. They will get in and out of the market too late or early. Many will say that investing is a scam and that they will never get into the market again. In fact close to 35% of Generation Y (born between 1980-1990) have said they will never invest in the stock market. Thats fine, we don’t need them, if the fear of losing money in a bad market forced you to forego investing all together you’re clearly not cut out to be an investor. But you must remember that you do not save for retirement, you invest for retirement. They say those who don’t know history are bound to repeat it, I can only hope this turns out to be false, otherwise we are going to have years of volatility to come.