Intellectually and Emotionally, Investors Wear Different Eyeglasses

“Intellectually, we all know that, over time, the stock market goes up,” says Sheaff Brock Managing Director Dave Gilreath (as well he might, looking back over no less than four decades in wealth management). In fact, a chart (shown below) of S&P 500 returns over the past 40 years shows “mostly good years mixed in with a few scary ones.”

Of course, few clients look at their investment account statements only once per year, Gilreath admits; a chart showing quarterly, rather than annual S&P returns over the same 40 years, portrays the markets as far more volatile, triggering a much more emotional response.

Viewing charts like this through “emotional eyeglasses,” investors might well feel their “fear factor” kicking in. Meanwhile, threats of war, high inflation, rising interest rates, old and new viral illnesses, investors find their “fear factor” kicking in big-time. Understanding this very phenomenon, Gilreath comments, the investment industry has been creating series of products with “guarantees” and “buffers” designed to deliver “defined outcomes,” promising high returns with low risks. 

Truth be told, Gilreath points out, convoluted, so-called “buffered” investments tend to involve not only higher internal costs, but limited upside return. 

Much of the media coverage surrounding markets relates to emotions, Andrew Kichings of Commonwealth writes. “When the market rises, we read about the excitement. When the market declines, we hear how investors are worried. This commentary can be very evocative, but it is not very useful.” What can be useful, encouraging investors to view market developments through their “intellectual” lenses, is the VIX volatility index, which measures the “bets” traders place through option trading. 

In contrast to those recommending so-called buffering, “we think it better to keep it simple,” Gilreath explains, sticking with direct securities (U.S. based stocks, preferreds, and Real Estate Investment Trusts). Selling options has potential to add income to the portfolio. Investors are encouraged to view the market fluctuations with their intellectual rather than their emotional eyeglasses!