Fear sells. Remember bird flu? It made headlines in 2006, with nervous predictions about a pandemic capable of killing tens of millions of people worldwide.
You only have to go back to 2014 for the Ebola scare, which never resulted in the widespread outbreak many predicted.
In both cases, TV news channels were among the winners, as viewers tuned in for the latest details.
The financial services industry, like media and many other fields, has a history of using fear to attract business. Predictions about dire events in global markets and economies are common, even in roaring bull markets.
One of those predictions made a splash recently as an analyst from the Royal Bank of Scotland predicted a “fairly cataclysmic year ahead” and advised clients to “sell everything except high-quality bonds.”
He also recommended that investors “beware of the risk-on optimistics.” In other words, be suspicious of those who don’t share the analyst’s feelings of panic.
It’s true that equity markets essentially imploded in January, with the Standard & Poor’s 500 index tumbling 10 percent.
Despite academic research indicating that long-term investors do better by staying the course rather than giving in to fear-driven selling, that kind of decline makes investors nervous. With the market free-fall of 2008 still fresh in people’s minds, advice such as that offered by RBS is often taken seriously by skittish investors hoping to avoid another bloodbath.
However, advisors are scrambling to remind clients that the economic and geopolitical conditions in 2016 don’t resemble those of 2008, and that normal market cycles include pullbacks and corrections.
Just because corrections are unpleasant and worrisome, investors should not feel compelled to shuffle around their holdings, says Charles Massimo, CEO of CJM Wealth Management in Deer Park, New York.
“Volatility is a temporary concept that passes with time. Most people see it as an excuse to act; those actions lead to real risks, self-imposed risks, like being forced to take a pay cut in retirement because you made a temporary loss into a permanent one when you sold after the market fell, you changed investments out of fear and your money couldn’t keep up with inflation,” he says.
He notes that market volatility, which sends financial-industry pundits into a frenzy, is not bad, in and of itself.
“In the last 35 years, the S&P 500’s average intra-year decline was in excess of 14 percent, with declines ranging from 3 percent to 48 percent. And yet, despite these big swings, the S&P 500’s calendar year returns were positive in 27 of the last 35 years, or 77 percent of the time,” Massimo says.
“Volatility could be high or low, but volatility is not bad. Volatility could go up or down, but by itself, it generally does not hurt an investor’s long-term returns unless the investor reacts to the volatility. Risk and volatility are not interchangeable,” he says.
Frank Pare, president of PF Wealth Management Group in Oakland, California, says investors should keep the bull-and-bear cycles, as well as market predictions, in perspective.
“I will be the first to admit, I have no idea where the market will end at the end of 2016 — no one does, for that matter. What is clear, however, is that we’re 83 months into a bull market as of Dec. 31, 2015, which puts us at about 30 months above the average time of previous bull markets,” he says.
That means there’s a widespread expectation that a market pullback may be due.
“However when and how severe is somewhat unpredictable,” Pare says. “You might recall that at the start of 2009, some in the media were advising investors to get out of the market due to a change in White House administrations. Again, very few would have predicted that March 2009 would be the bottom and the market would go on such a run.”
Pare says it’s understandable that a warning from an established financial institution such as RBS would stir up some concern. “And it’s conceivable that we could be heading towards or in a bear market,” he says.
“I’m still comfortable with staying with your investment plan given your current life situation. Therefore, I don’t see a need to make an attempt at timing the market based on current headlines,” he says.
Bryce Doty, senior portfolio manager at Sit Investment Associates in Minneapolis, says investors can mitigate downside risk without bailing out of their investments altogether, as suggested by RBS.
“Timing the market is always risky and rarely profitable for even the most skilled investors. Following this type of advice is also very disruptive to a well-balanced portfolio. You may suffer tax consequences, lost income and the obvious lack of upside if the advice is wrong,” Doty says.
Doty manages the Sit Rising Rate exchange-traded fund (ticker: RISE), which shorts Treasury futures contracts. It’s designed to increase in value while Treasury prices are declining, due to rising rates.
He acknowledges that fixed-income investors are rightfully concerned about rising rates and the corresponding losses on their bonds.
“A better strategy than selling everything and giving up all of their income would be to invest a small portion of their bond portfolio in strategies that can protect and help preserve the investment while you wait for financial markets to settle down,” he says.
“Likewise, there are strategies for helping equity portfolios. Investors could simply invest in put options on the S&P 500 during times when they are nervous. This helps limit your downside while still capturing any rebound,” he says.
Even if RBS is correct and 2016 turns out to be cataclysmic, investors still face the difficult question of when to jump back into the markets.
“Corrections can be quick and painful. Panic selling can drive prices well below rational levels,” Doty says. “However, the further the decline, the greater the potential rebound. And it’s often darkest just before the dawn, making it extremely difficult to have the courage to get back in at just the right time.”
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Wall Street Doomsayers Saying ‘Sell Everything’ Are Just Wrong originally appeared on usnews.com