Following on from my previous blog, in the discussion with my fellow golfing member I told him that the great majority of investors in Australia are NOT active in the share market at the moment. Retail investor activity in the stock market is at multi-decade lows and retail investor sentiment towards shares is at the levels last seen in the late 1980’s or early 1990’s (Westpac/Melbourne Institute Consumer Sentiment Survey). This is despite the All Ordinaries being up around 70% since March 2009 and around 30% since June 2012. This is a classic contrarian situation.
Once an investor forms a view that they have to do SOMETHING, the first challenge is that of overcoming what’s freezing them into inaction right now. Invariably, when it comes to the stock market it is the fear of losing, although this may be guised by excuses such as “I’m too busy.”
He asked me how this is done, explaining that his biggest fear is that of losing a significant amount of his capital close to the end of his investing career if a large bear market was to occur.
I explained that this is simpler than most think and that I have found, through trading experience and research, that defining the criteria in advance under which you will completely exit a given investment strategy is the best way to overcome this fear. The exit should be temporary until conditions improve again for that strategy but the exit criteria should always be monitored while the strategy is in play.
“My view,” I told him is that “taking the step of defining these criteria is immensely liberating. It liberates the investor to consider what may be possible on the upside.”
Without taking this step the investor’s mind is filled with “Henny Penny… the sky is going to fall on my head,“ which blocks out the potential reward of what could occur if markets did the opposite and rose strongly. Doomsday commentators have exactly the same effect on investors’ sentiment.
The dangerous problem with hanging on to the fear of losing for too long is that at some stage, should the bull market in equities continue, the fear of losing will slowly be overridden by the fear of missing out. This will typically lead to a knee jerk reaction of getting into the market at far higher prices and at far higher risk of losing. Today’s inaction will certainly realize today’s fear – that of losing – at some stage in the future. Paradox? Yes.
In such a scenario, the investor’s inaction will have proved that the fear was justified, as what was feared, losing, becomes a reality! But not because of the market, which will get blamed, but rather by the inaction caused by fear. Rather than getting to work on overcoming the fear of losing, the investor will merely repeat the same mistake next time creating an eternal loop of losing, because of the fear of losing.
What’s on offer for putting in this effort?
The next step thereafter is to determine what strategy to use to capture a decent chunk of the upside. You may consider a long term buy and hold in large cap stocks with a wide trailing stop and get returns similar to the ASX20 Accumulation Index, or using products from Share Wealth Systems which can way outperform such a strategy.
Well how far could the Dow Jones go in the longer term if we are indeed at the beginning of a secular bull market? Consider this 116 year chart of the Dow Jones Industrial Average and this 84 year chart of the S&P500.
If the Dow Jones and S&P500 get close to repeating what they did when the last two secular bear markets transitioned to secular bull markets, then the following mindboggling levels could be reached in each of the indices nine to ten years from now: DJIA 42,300, S&P500 4,745, NASDAQ Composite 9,792.
This would represent around 12.8% CAGR over this period compared to 11% CAGR and 13.8% CAGR in previous secular bull markets.
The All Ordinaries didn’t perform as well as the USA equity indices during the same market phase but even so, a similar growth to what the All Ordinaries managed during the last secular bull market would see it reach around 13,120 in nine or so years’ time! I know that seems eons away but one needs to step back and gain possible big picture perspective without being blinded by gloom and doom!
Difficult to comprehend? But so was the Dow reaching 983, sixteen years after it was at 202, or reaching 2,480, nine years after it was 850. Or the S&P500 reaching 1,527, twenty years after it was 111! All achieved during secular bull markets.
What’s even more scary is that should this secular bull market be confirmed and continue for a similar period as the previous one and at a similar growth rate for the respective indices then a DJIA at 192,558 could be reached around 2033!! And an S&P500 at 21,520!! And an All Ordinaries at 28,100!!
“Now that’s scary!” said my fellow golfing member. Possible? Certainly, it’s happened twice before in the last century at times when investors couldn’t perceive it being possible. “However,” I said, “the downside must be protected and the fear of the downside not be a showstopper that freezes one into inaction.”