Excess Risk-Taking Near the End of a Bull Market

Thu, Apr 5, 2018 - 2:42pm

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"Many retirees and pre-retirees worry about market losses derailing their retirement yet pursue aggressive investment strategies," notes a recent comprehensive survey by MassMutual. Financial Sense Newshour's Jim Puplava discussed some of the key highlights and offers some advice for investors given the findings.

Investing vs. Gambling

The MassMutual Retirement Savings Risk Study focuses on retirees and pre-retirees who are within 15 years of retirement. It examines investor thinking and the differences between the two different groups, highlighting the greater risk these groups are willing to take.

“Given the environment in which we find ourselves, you may want to rethink risk,” Puplava said. “Number one is giving up your gambling habit.”

The insurance company surveyed 804 pre-retirees 10 to 15 years away from retirement, and 801 retirees, all who had substantial assets. It was conducted in late January of this year, while markets were still on a path upward, so the attitudes it captures reflect risk appetite coming off of a 9-year bull market.

"Both retirees and pre-retirees say they worry that a major downturn in the stock market and poor investment decisions could derail their retirement. Yet many are focused on aggressive investment strategies," MassMutual's Tina Wilson stated.

This could present a problem if leading economic indicators begin to weaken, as some metrics currently suggest (see below).

Source: Bloomberg (see notes), Financial Sense Wealth Management

What Retirees and Pre-retirees Need to Do Now

There’s a bias to look back at a bull market and regret not being more heavily invested. The survey also highlights investors’ bias toward excessive risk with investments in unproven markets, such as that of Bitcoin.

“You don't want to find yourself getting more bullish and making more risky bets at a market top and becoming … overly bearish at a market bottom,” Puplava said. “Most bear markets and recessions don't start when everything looks bad. They slide down from a period where everything looks good and that's where people are optimistic and they're willing to take those risks.”

We’re 9 years into this market recovery, which is the second longest in history. By the beginning of next year, if it remains intact, it will be the longest bull market and economic recovery in history.

Right now, there are numerous risks developing, many of which Puplava has pointed out during the show. The Fed is raising interest rates during a time when a lot of high yield debt is coming due—that’s typically a trigger for a shift.

“As we're seeing right now with the recent volatility, investors need to think about preserving capital, especially at this late stage of the business cycle,” Puplava said. “That was the purpose of this survey, and what it really points out is investors are taking a lot more risk than they realize with their own portfolios, which is very typical at the end of a bull market.”

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Bloomberg notes on Westpac's Financial Stress Index: "The US Financial Stress Index (FSI) is based on IMF methodology and is a composite index which attempts to identify periods of financial stress by using high frequency market based variables. Specifically there are 7 variables in the index - namely bank sector beta, the Ted spread, inverted yield curve, corporate bond spread, stock returns, time varying stock volatility and time varying exchange rate volatility. Each variable is adjusted by its own mean and standard deviation to reduce the impact on the index of the more volatile variables. The FSI is then constructed as an average of these 7 scores."

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