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This Halloween investment chart is actually built on fear

To mark Halloween, here is a genuinely scary chart – and, just for good measure, it is one that actually stems from a very particular kind of fear

31/10/2017

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

Forget ghoulies and ghosties and long-leggedy beasties – not to mention things that go bump in the night – this Halloween there are already plenty of reasons to lie shivering under your bedcovers.

From Donald Trump’s unconventional approach to running the world’s largest economy to the hugely volatile situation in the Middle East, these are worrying times to say the least.

So how are private investors reacting to an environment that also, of course, includes the uncertain outlook posed by Brexit?

Why, by taking their cash levels down to record low levels – what else?

Seriously, folks, when we recently suggested in the context of North Korean leader Kim Jong-Un’s nuclear ambitions ‘There is no perfect time to invest, so seize the day’, that is not really what we had in mind.

But take a look at the following chart, which shows the cash balances held by private clients of US financial services giant Charles Schwab from 1995 to now.

As you can see, the current level of 11.1% is by some distance the lowest it has ever been – and yet what really makes this chart so appropriate for Halloween is the other two major lows.

 

 Source: Morgan Stanley, October 2017

 

As you will also see, these came in early 2000 and late 2007 – and were thus just ahead of two of the worst market crashes of all time.

Investors may indeed be paying lip service to the various risks now bubbling up in the world’s macroeconomic cauldron but their actions – in effect, putting their foot down on the accelerator – suggest there are other forces at work here.

Yes, we are firmly in the realms of behavioural finance, with the above chart illustrating investor confidence is very countercyclical in nature – which is a polite way of saying ‘prone to lousy timing’.

'FOMO'

Writing recently on another scary market development – The flood of cryptocurrency ICOs – we quoted a nice line from The Economist: “Nothing makes individuals more willing to take risks than the sight of other people getting rich.”

Oddly enough, at the heart of that sentiment lies each of the two emotional ghoulies that drive market excesses.

Obviously enough there is greed but also – and again highly appropriate to this time of year – a very particular kind of fear.

It is ‘FOMO’ – the fear of missing out – and it is something of which investors really do need to be afraid. Very afraid.

Author

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm. 

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