By BRIAN HEPP
It has been said that of the emotions, fear is among the most powerful motiva-tors.
Investors in recent years can certainly confirm the reality of that statement. Fear of monetary loss can be a very influential modifier of behavior, and at extreme levels it can lead people to avoid even low-risk activities. But while exercising a certain degree of caution is always a healthy attribute when investing, investors should be careful not to overlook opportunities.
Take the example of stock market investors just five years ago, during the run up before the “tech bubble” burst. Despite the fact that the market was at all-time highs, fear of missing big gains led many people to throw caution to the wind and invest even more in an already inflated market. Today, on the other hand, fear of big losses — which is exactly what happened to many equity investors immediately following those all-time highs — now leads many to forget about prudent opportunism.
Successful investors find a way to ignore the classic emotions that tend to cause problems when making investment decisions. When others see nothing but big profits in the immediate future, “prudent opportunists” employ a more disciplined approach that emphasizes caution. Conversely, those same investors look for opportunities for profit when most are overcome by fear of loss.
In today’s market, those two polar extremes appear to be at work simultaneously. Many investors are betting on the profit potential of real assets — especially real estate — but at the same time they remain fearful of financial assets, especially stocks. Replacing that fear with caution and opportunism should bode well for investors going forward.
In addition to the dynamics at play in the market, current economic conditions also are leaving investors a bit unsettled. Adding to investor anxiety is the fact the Federal Reserve has been raising interest rates due to the fact that policymakers believe that the economy no longer needs the help of rates that were at record lows.
When the Fed raises rates, many investors fear those higher rates could negatively impact economic growth. In fact, by “stepping on the brakes” and raising rates, the Federal Reserve has helped create a climate that will actually help sustain the recovery by keeping inflation low. Economic growth has cooled — but not stopped — and inflation has remained relatively modest despite rising oil prices.
Helping keep inflation in check, commodity prices also have pulled back slightly. Simply put, this means businesses aren’t spending quite as much to manufacture their products or to re-invest in their business. Barring unforeseen developments, all of these factors should help sustain consumer spending, business investment and the economic recovery.
Given the state of the market and the economy today, those who take the “glass-half-empty” view may think they can make a case for what they have to fear. On the other hand, there is certainly a “glass-half-full” argument to be made, and investors who work diligently to find opportunities in this market could be pleasantly surprised by what they encounter. (Brian Hepp is a financial consultant A.G. Edwards & Sons, Inc. Member SIPC. Hepp (310) 453-0077 or at A.G. Edwards is a full-service retail brokerage that offers a complete spectrum of financial products and services, including stocks, bonds, and mutual funds, retirement planning and tax-advantage investments.)
Originally published in the Santa Monica Daily Press print edition on July 14, 2005. Read the original PDF.