Investors can use risk management tools to overcome fear
On April 10, USA Today published an article entitled "Is fear factor hurting returns of risk-averse investors?" which discussed how investor sentiment about the markets has not yet turned positive despite the recent all-time highs seen in the Dow Jones and S&P 500.
The article suggests that, in spite of the recent rallies, the bear market of 2007 to 2009 has left much of the American public in doubt about investing, fearing that the current risk of the market as a whole is simply too great.
Citing research from Strategas Research Partners, which found that the S&P has only suffered calendar losses of more than 20 percent in six years since 1926, the article suggests that "many investors, fearing the worst, have been ignoring the fact that the stock market goes up two-thirds of the time." Instead they have deserted equities opting for "cash, bonds and gold, or any other asset deemed safer than stocks."
"As a result, worrying about worst-case scenarios, such as a second financial crisis, a breakdown of the global financial system, a bank run in Europe, a looming stock market correction or the U.S. economy suffering a major relapse, might have caused more harm than good," the article posits.
Instead of running from risk, which is often tied to return, investors could choose to simply manage risk better. Investing tools are available to help them do just that, such as SmartStops' Risk Management Service which monitors a user's portfolio throughout the market day watching for signs of elevated risk. If a position falls and triggers its SmartStop, an indication of elevated risk, an alert is sent enabling timely protective action.
While the fear generated from the recent market turmoil and the subsequent run toward "safe" assets may be overblown, "Sargen says investors shouldn't let their guards down, as he "can't entirely rule out Financial Crisis Round Two," given continued risk due to Europe's debt crisis, other geopolitical risks and central bank monetary policy.
At SmartStops, we offer risk management tools that investors can use to make decisions that allow them to sidestep periods of abnormal risk exposure.
Further, our SmartStops Risk Ratio (SRR) and Risk Barometer Index (SRBI) are designed to indicate the magnitude of risk and the direction of the change in risk in major markets. This tool allows investors to easily view the number of equities that are in an elevated risk state in markets like the S&P 500, Dow Jones Industrial Average, DAX and CAC 40 against historic factors.