Back when I was a kid, there were times that I wanted to do something because everybody else was doing it. It was probably the latest fad or the cool thing to do. It was my first introduction to herd mentality and FOMO, fear of missing out.
No matter how much you tried to convince your Mom that your life would be so much emptier if you didn’t join your friends in this latest pursuit, your Mom would inevitably say something like, “if all your friends were jumping off a bridge would you do it too?”.
Your Mom was trying to protect you and was trying to teach you to think for yourself. Maybe she thought that if you followed the crowd, you might get hurt or disappointed. Well, those early instincts that your Mom had would likely hold true as we look toward investor behavior.
As you can see in our first chart below, people tend to invest heavily in investments that have recently done well. This means they are buying high, after prices went up. Note the significant positive fund flows around the peak of the dot.com bubble in the year 2000, as well as the multiple years of contribution just before the ‘07–‘08 financial crisis. You will also notice that in 2021, when markets were at all-time highs, we had our biggest year of deposits ever.
You may also observe that in years like 2008 and 2021 when markets were going through significant downturns and prices had dropped, people were pulling money out of the markets en masse, i.e., selling low. You will also note on the right side of the chart above that the market tends to do well in years following the panic selling and price drops.
Our next chart gives you further insight into this. I love this chart because it literally coincides with when I started my career as a financial advisor in August 1987. I tell people that one of my claims to fame is that I was actually in the business when the stock market crashed 22% on Black Monday that October, and that none of my clients lost any money. However, this is only true because I was so new to the business, that I did not have any clients…yet.
It is interesting to see how the markets turned and moved higher in the years following these significant financial events and market selloffs. However, that also begs the question, when is the bottom and have we reached it yet? That’s the tricky part, we won’t know until several years down the road, and we are able to look back and clearly see where the bottom was. However, we do know that buying after prices have dropped, buying low, is a good idea, even if prices temporarily go lower before moving back up.
So, what is cheap now? As we look at our final chart, we can see that emerging market stocks have now experienced a negative five-year average rate of return. Many people are questioning the wisdom of investing in something that has performed so poorly. However, you can see that on a historical basis, investing in these markets when returns have been poor, and therefore, prices are cheap, has led to good returns in the following 3 to 5-year time periods.
We know that when we go through major market downturns such as the dot.com bubble or the Great Financial Crisis, what was leading the market previously is not typically what does well in the next market upswing. Instead of looking backward and hoping that what did well previously will carry the banner forward once again, perhaps we should be looking to what did poorly recently, which might reemerge as a market leader.
It appears that we are transitioning from a period of low interest rates and low inflation to a cycle of higher inflation and higher interest rates. We should not expect the same type of stocks or investment asset classes to do well in the next cycle.
Perhaps your mother was right, you should not follow the crowd. While doing what everybody else is doing and FOMO are real things, they HAVE NOT been a successful thought process or strategy to follow when choosing your investments.
The CFPs of Impel Wealth Management are aware of this and are constantly scouring the markets and the research of investment management teams we follow to see where the next opportunity may lie. It is part of our mission to help you, our trusted friends and clients, manage and build the financial resources you entrust to us. This is our motivation as we continue “Moving Life Forward”.
© 2023 Jesse Hurst
The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.