Following the Leader: Just Say No

It’s human nature to want to do what everyone else is doing, to be a part of the group, to not feel like you’re missing out. This is a topic we covered in our last post, where we zeroed in on the herds that go along with the cleverly manufactured shopping day known as Black Friday.

Picking up where we left off on the herd mentality conversation, we wanted to compare that thinking with investing. Because just like the herds that exist on a strategically hyped shopping day, investing has its own brand of herds –– which can often lead investors down unfortunate paths.

And this holds especially true in the current market, where artificially low interest rates have created an unfair environment for savers and a herd-like, follow-the-leader march into risky areas, especially for an older investor. Like stocks.

Wednesday’s Wall Street Journal op ed article (How the Fed has Warped the 401K) spells it out well. And as they wisely point out, “Older workers seeking returns have piled into stocks. When interest rates finally rise, watch out.”

Three important facts to consider:

1) A report from Fidelity Investments found that 11% of account holders between the ages of 50-54 have a staggering 100% of their retirement assets invested in stocks. This means that investors looking for  better returns have resorted to over investing in equities and high-yield corporate bonds (aka junk bonds which carry more risk) to generate the returns they need to avoid outliving their nest eggs.

2) Many investors are not buying based on fundamentals but rather they’re following the crowd. And it was estimated that “roughly $1.3 trillion in retiree assets are currently misallocated into equities based on the historic 16-year average price to earnings ratio for the S&P 500, resulting in stock price inflation that has kept equity valuations aloft.”

3) When the Fed does raise rates, watch out for “a steady exodus from equities, which will cause valuations to fall more in line with fundamentals which have not supported the high valuations we’ve seen over the past several years.”  In short, those closer to retirement need to de-risk their portfolios.

Following the herd as an investor is an easy habit to fall into and unfortunately, one that happens often. Many investors start putting money into the market in the middle of, or near the end of, a bull market only to suffer when that market declines. Now would be an ideal time to revisit portfolio allocation and ensure you are comfortable with the level of risk in your portfolio and preparing for the inevitable market pull back.  As always, please call or email us with any questions.

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