| Last week I came to
a realization. It's one I've suspected for a while, and finally realized after witnessing
the reactions of many investors to last week's market volatility.
(For the record, the Nasdaq dropped by one-fifth of its
value on Monday and Tuesday morning, but recovered to be down less than 3% for the week.)
Last Week's Market Tested the Mix
My new conviction is that there are two absolute types of
investors in the country: long-term, buy-and-hold investors, and investors who tend to
move their money around a lot. In the past I believed that these two investor groups were
simply prototypes — that in reality most investors were a mixture of both types to
varying degrees.
This mix of investing styles often has been frustrating to
investment advisors who believe long-term, buy-and-hold strategies are the path to
investing success. These investment advisors, myself included, have been waging a war for
the hearts and minds of the investing public with a variety of enemies — market
timers, pundits, brokers, and certain members of the press who are continually
recommending that investors move their money around.
Last week I realized that we won the battle, albeit not the
war. And the reason was...I had a great time last week. Yes, markets were fluctuating
wildly, and it was fascinating to watch the Nasdaq roller coaster. These events, however,
had virtually no impact on me as an investment advisor. The most significant hassle of the
week for me was that the seven-year-old center fielder on the little league team I coach
threw to the wrong base on a key play. But as far as work goes? No problem.
Yes, I Was Busy on Tuesday
How could an investment advisor not be, when the Nasdaq by
mid-day had fallen 14%. And what was I most busy with? Dealing with the press. A TV
interview, newspaper reporters' calls — it was an egomaniac's delight. I also wrote
commentary specific to the week's events for our participants, and also posted to our
community Web sites, which wasn't much trouble.
Despite the Roller Coaster, All Was Calm…
Wednesday morning I received a call from a reporter at a
monthly financial magazine. She started the conversation by asking if I had recovered from
the events of the day before. I'm sure she pictured a chaotic office with the phone
continually ringing, assistants shouting over each other, and me running around trying to
talk despondent clients down from window ledges, but it wasn't like that.
Yes, I got a few e-mails and phone calls, but they were
from either brand new clients or wanna-be clients. I didn't field concerned inquiries from
any client who had more than six months of experience with us. Not one! And I'm easy to
reach — just a mouse click away.
Well, I thought, maybe that was just me. Then on Friday I
talked to a friend — a well-respected, successful, face-to-face financial advisor
with a large client base. And he said he didn't receive any calls from clients.
Again, not one!
…For the Banal Majority
So who were all of these people who were quoted in the
papers about their market nervousness, and whom we saw on TV news reports with worried
looks? The ones wringing their hands while inspecting a quote board were among the second
type of investor — the money movers — and they make great press.
The buy-and-holders don't worry about short-term movements,
and when they are interviewed, man do they sound boring.
If you're a reporter, how many times could you write the
"I'm leaving my money where it is" story. The viewing audience wants intrigue,
excitement, and emotion, and so news reports focus on the day traders, the market timers,
and the panic stricken.
The money movers' investments comprise a relatively small
portion of the money in 401(k) plans, IRAs, and mutual funds. The banal majority are
buy-and-hold investors — they pay attention to large market swings but don't react.
The banal majority keep their money in the market even
during turmoil, and watch the money movers sell at the market bottom.
(Another one of my market-experience confirmed suspicions?
For every day trader who claimed to have bought in when the Nasdaq was at its low,
there's a real short-timer who locked in a two-day loss of 20%.) The banal majority
doesn't panic. In fact, they don't even worry.
That's why my financial advisor friend and I received many
phone calls from the media and none from concerned clients: A few misguided gamblers on
high-volatility days does not an investing public make.
I mentioned earlier that we investment advisors have won
the battle but not the war. The war will be won if we have a decline like the one we had
in the early 1970s, in which stocks fell 40%, without investors panicking. (See the Bear's Cave for further analysis of that market.)
The war may be unwinnable, but only time will tell. In the
meantime, as an investment advisor who advocates the long-term, buy-and-hold investment
strategy, the most pressure I feel right now is locating another position for my
seven-year-old, Ken Griffey Jr., to play.
 Lummer's Logic Archives
Scott L. Lummer, Ph.D., CFA, 401k Forum's Chief Investment
Officer, is a recognized expert in the investment field. He has conducted extensive
research on asset allocation, international investing, risk management, mutual fund
analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook.
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