“The whole idea that the stock market reflects fundamentals is, I think, wrong. It really reflects psychology. The aggregate stock market reflects psychology more than fundamentals.”
Robert Shiller, Nobel Prize-winning economist
Tired of low returns? You may be a bond investor.
Bond investors have been “growing tired of low returns, the endless warnings that rates are about to rise, and constant reminders of the dangers of riskier bonds,” according to Jeffrey Matthias, CFA, CIPM of Madison Investment Advisors.
At the same time, they’ve watched the stock market continue to break new records every time there’s another sign that a central bank somewhere may buy a few bonds or lower interest rates into negative territory.
“None of us have ever lived through this kind of extreme, long-lasting suppressed rate environment,” Matthias wrote, and, as a result, those bond investors who are mad-as-hell-and-are-not-going-to-take-it-anymore have been frustrated enough to take on a lot more risk for a little more yield.
When you chase yield, you catch risk. It’s a dangerous reaction to the yin and yang of investing – fear and greed.
“Typically, when markets are moving higher,” Matthias wrote, “most investors turn greedy and want more. Should an investor’s more conservatively positioned portfolio produce lower returns when the market surges, the investor may regret not having taken more risk. In contrast, should a riskier portfolio drop significantly in market value, the opposite may happen and an investor may begin to regret (his or her) decision to have invested in risker assets. This can be accompanied by a fearful overreaction.”