Barriers to Financial Security: Important Lessons \ INTRODUCTION

When you consider the current economy, the last thing you are probably experiencing is “irrational exuberance.” Federal Reserve Chairman Alan Greenspan was the first to use this phrase in the mid-1990s. Only a few years later, Amazon.com, once merely a retail book company started in a garage, was trading at $91 a share with a history of negative earnings (MarketWatch, 2002). In other words, people were willing to invest in a company by purchasing stock that had and would continue to lose money. If you contrast this level of performance with that of the average stock in the S&P 500, you can see how those Amazon investors were gambling with their money in response to irrational exuberance. When Greenspan coined the phrase, the stock market was booming, so few people were likely to heed what we now recognize was a warning. Shortly after he made the comment, world markets slumped.

During global economic crises, we read alarming headlines. Consider the following:

Recession Starts Taking a Toll: Will it lead to another crash? “Worries are building that today’s sagging economy may be on the brink of collapse.” U.S. News and World Report

The Death of Equities “7 million stockholders have defected from the stock market [this decade], leaving equities more than ever.” Business Week

Running Short of Cash “The United States and its allies scrambled to head off a global financial disaster. Finance ministers from the United States, Britain, France, Japan, and West Germany met last week near Frankfurt to find a way to avert a global economic collapse.” Newsweek

These were not pulled from today’s headlines. They come from November 1974, August 1979, and December 1982 when investors were experiencing great fear in the midst of bear markets. Fortunately, the financial world did not come to an end at any point, not in 1974, 1979, nor 1982. And though national and international efforts certainly played a role in the investors’ returns, what may have played the most significant role were individual investors’ abilities to make logical decisions in the face of financial fear. Investor behavior does matter, and it arguably poses the greatest risk to successful long-term investment experiences. Furthermore, the outcomes of investor behavior are even more dangerous to the financial security of people transitioning into or living in retirement. This article is the first in a series about investor behavior and psychology, historical perspectives, the importance of diversification, and possible solutions to the challenges investors face.

Investor behavior does matter, and it arguably poses the greatest risk to successful long-term investment experiences.

James E. Wilson, CFP®

This is the introduction to a seven part series on Barriers to Financial Security. To download a copy of the full whitepaper, please click here.