Fear Sells, But Should Investors Be Buying?

Fear Sells, But Should Investors Be Buying?

March 15, 2016

If you consume any kind of financial media, you can't help but notice a recurring theme: Negativity.

Why all the doom and gloom? Our theory is that there's actually an incentive to scare from the media because it makes for a compelling story that sells. Firms that create financial products stand to benefit from fear too. What's that? You're an investor craving greater stability? They've got a product for that.

Yes, fear sells.

However, just because someone is telling you the world is about to end doesn't mean you should necessarily race to put the next great "risk management" investment product in your portfolio. Breathe. Have some perspective. Realize that there isn't a day that goes by when our own firm isn't presented with a sales pitch to put such products in our clients' hands. So that seemingly "golden opportunity" isn't as rare as someone may make it out to be.

That's when having a combination of optimism and discipline, especially when uncertainty is swirling about you, is important.

Should we obey fear when we invest?

Rather than listening to fear when we invest, we strongly defer to economic evidence rather than emotion. Case in point: It is our view that stock prices go up primarily because earnings go up. Earnings go up for two reasons: Productivity and inflation.

Let's focus on productivity in the oil and gas industry for example. Efficiencies in production mean that the US now has more oil than Saudi Arabia. Despite the fear in markets, this has been great news for growth in the past.

A strong economic mechanism is behind oil prices going down and global growth going up. Because the world burns 34 billion barrels of oil every year, a $10 decrease in the oil price shifts $340 billion from oil producers to consumers. The $60 fall in the price of oil since August '14 will redistribute more than $2 trillion annually to consumers. (The US economy is 70% consumer spending, so consumers are a lot healthier financially, than they were a year ago)

At Fiduciary Financial Partners, we are Value Investors. Here are the annual returns of a US large cap value index (that closely tracks our strategies) for the 5-year period after oil prices fell by 50% or more.

The Last 5 Times That Oil Prices Fell by > 50% or More VS. Next 5 Year average annual Return*:

'82-'83:19.0% / year for 5 years
'85-'86:14.5% / year for 5 years
'92-'93:22.% / year for 5 years
'97-'98:8.1% / year for 5 years
'01-'02:15.4% / year for 5 years

*Dimensional US Large Cap Value Index: (Total Return): Index compiled by Dimensional: Matrix Book 2015 Historical returns: US Dollars: page 25

This can be life changing if the future looks anything like these five examples. It is far too easy to be swayed as an investor by the emotions that can be stirred up in our ever-present media. However, rather than invest based on such emotions, consult with our financial advisors at Fiduciary Financial Partners, who can help clarify economic fact from fiction, or watch our 2016 Market Preview to gain some perspective so you aren't investing in fear.

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Confidently embrace your financial future!