People don’t usually think of positive stock market returns as a stress trigger. But the last few years have been very stressful for many people.
Those who shifted their portfolios into ‘defensive’ investments and asset allocations during the Great Recession have subsequently watched the U.S. market sprint upwards. The S&P 500 closed above 2000 for the first time on August 26th, and the Dow closed above 17,000 in early July.
The fall-out has been interesting.
During the Recession, variable annuities that limited the potential downside to investors were widely marketed to consumers. Unfortunately, these products are very complicated and unclear, and their costs and limitations were a challenge to uncover in the volumes of disclosure paperwork provided during a sale. Now these annuities are a top source of customer complaints, according to the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).
Chief among customer complaints are disclosures and surrender charges. In other words, few people understood what they were buying. When the markets recovered they received far less in returns than they thought they would, but due to contract limitations and surrender charges, they’re stuck.
A more recent development is the promotion of public, non-exchange traded real -estate investment trusts (non-traded REITs).
REITs are one of the investment categories that have done particularly well during the market recovery, partially because they have been promoted as a safe income alternative to bonds; but they are not investment equivalents. According to the Wall Street Journal, sales have tripled in these investments since 2009. Massachusetts, Ohio and Washington state are particularly worried about the surge in sales.
Unlike the REITs that are bought and sold daily on the exchanges, and held in the DFA Real Estate Securities Portfolio we use in our clients’ portfolios, these non-traded REITs are not liquid. A June Wall Street Journal report noted that these non-traded versions have front-end fees ranging from 12%-15% in addition to other fees over the life of the investment. But because they are not traded daily, you can’t look up their value and see the impact of these charges.
People who purchase these non-traded REITs will find they are stuck in something they can’t sell easily, or without a significant cost, just like the consumers before them who purchased annuities as a safe haven.
Positive market returns also cause stress for disciplined investors. Many of our clients who stayed invested, were disciplined, and rebalanced by adding to their stock funds during the downturn are feeling a touch of anxiety.
Some wonder if stocks are overbought, but others wonder if they are too conservative in their asset allocation, and are letting better investment returns pass them by.
In both good times and bad, the key to successful investing is focusing on the returns you require to meet your personal lifetime goals. Taking more risk just to add potential market returns higher than you require is no different than gambling, because you can just as easily experience an inevitable market correction, just as you decide to get more aggressive.
Down markets may tempt us to become more conservative or search for a magic investment solution, but positive markets hold their own risks. In up and down markets, long term success comes from staying focused on your plan.