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Investor Psychology

Investors, Keep the Faith

If you succumb to an unhealthy fear of stocks, you've committed one of our seven deadly sins of investing.

One thing is for sure: If I had $1 for every time the word uncertainty has appeared in an e-mail, press release or news story about the economy or the stock market, I’d have enough to treat myself (and my spouse) to a nice dinner.

-- A report from the Federal Reserve Bank of San Francisco says a sharp increase in “uncertainty” about federal fiscal, regulatory and health care policy since 2009 has dampened job creation and contributed to high unemployment.

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-- More than two-thirds of private economists surveyed by the National Association for Business Economics said that “uncertainty” about fiscal policy is holding back the economy.

-- On September 3, economist Ed Yardeni, whose commentary I read regularly, titled his morning briefing “Looking Up!” On September 4 came the sober follow-up: “Uncertainty.”

In fact, uncertainty has become such a fact of life that I have written a column about it each year since I became editor in 2009. This time, the 800-pound gorilla looming over the landscape is the Middle East. But even before that, investors were nervous about when the Federal Reserve would start tapering its bond-buying program, how that would affect interest rates and who would succeed Ben Bernanke as Fed chairman.

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Even apparently good news comes with caveats. Yardeni says that improvement in the labor market is weaker than it seems because so many new jobs are part-time, and that the housing market could be vulnerable to even a small uptick in interest rates.

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Cash rules. All of this is taking its toll on investors. In our cover story last April, we noted that even though the bear market had bottomed in 2009, many investors were still “scared stockless.” And trading glitches such as those experienced by Nasdaq don’t help to inspire confidence. Investors did tiptoe back in as the market hit new highs earlier this year. Nevertheless, when investors were spooked by the specter of higher rates and bailed out of bonds over the summer, much of the money poured into savings accounts. “Instead of a Great Rotation out of bonds and into stocks, it’s been more of a Great Liquidation out of bonds and into cash,” Yardeni observes.

Pimco’s Bill Gross wonders whether the Fed’s zero-interest-rate policy has backfired: “Perhaps when yields and expected returns become so low, then risk-taking investors turn inward and more conservative, as opposed to outward and more risk-seeking.” In fact, Americans have become so leery of taking risks that cash is their preferred long-term investment, according to a report by Bankrate.com. Asked about the best way to invest money they wouldn’t need for more than ten years, 26% of those surveyed favored cash, edging out real estate (23%) and gold or other precious metals (16%). Only 14% picked stocks.

Boosting your cash cushion in the face of uncertainty makes sense. But if you succumb to an unhealthy fear of stocks, you’ve committed one of our seven deadly sins of investing, which will surely lead to stunted returns that won’t get you to your goals. In fact, says Meir Statman, an expert on behavioral finance, “many investors are living as if we were still in 2008. They’re driving too slowly in the right-hand lane” (see Smart Investors Keep It Simple).

How can investors regain their mojo? You can’t control events in the Middle East, but you can avoid the personal pitfalls that have an even bigger effect on your returns. If you invest regularly, for example, you won’t have a chance to get cold feet. And you can’t go wrong if you drive in the middle lane.

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