The Psychology of Anchoring – a Market Perspective
Over the past 12 years, investors have been given ample reasons to have their confidence shaken to the core having experienced two of the worst bear markets in history with the exception of the 1929-1932 wipe out of 88%. Of those that did experience the 88% financial collapse and that had any meaningful wealth in the market, they should be celebrating birthdays that involve three digits. The psychological impact on investor behavior has been massive, and the two bear markets have left memories of the market that are anchored in the pain of the collapse. What isn’t anchored is the meaningful progress the market has made over the years. We’ve all heard the media and skeptics hammer home the concept of the lost decade in stocks. Stocks have gone nowhere for 10 years. How often do we still hear that? So we need to help people move on and share the reality of the market with them. Yes, it has been volatile. Yes, there have been periods of painful returns. But let’s look at some of the return data as of June 30, 2012, and for simplicity’s sake, we’ll just use the S&P 500 as “the market.” We all know the S&P 500 isn’t the market, but it is one measure of market performance.
|1 year return:||5.44%|
|2 year return:||17.39%|
|3 year return:||16.3%|
|5 year return:||0.22%|
|10 year return:||5.32%|
|15 year return:||4.45%|
|20 year return:||8.33%|
We’ve weathered many storms over this time period: collapse of Long Term Capital Management, Russian credit crisis, tech bubble, sovereign defaults, September 11 terrorist attacks, housing bubble, financial crisis/bailouts, the ongoing European credit crisis and our own fiscal issues here at home. Through it all the markets rolling returns, ending June 30, 2012, are without exception positive. There is not a single rolling period ending June 30, 2012 with a negative return: not one.
So, the next time we are engaged in a conversation of despair and hopelessness with those that have given up on the market and will accept 0.15% in money market, please help move their psychological anchor from that of the bear market to the reality of performance over time. Help them understand the interest rate environment where we are near all-time lows with the 10 year Treasury yield falling as low as 1.44% in early June, currently at 1.6%. This interest rate environment sets up fixed income in a very difficult spot to deliver returns that will meet expectations over time. It is all about managing expectations, and to do that within a historical perspective is helpful.
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