Fear Itself

Just before 3 pm on Thursday, May 6, the common shares of Proctor & Gamble* seemed to have fallen 37%. The rest of the market followed quickly, and in just over 20 minutes the Dow Jones Industrials^ fell just shy of 1,000 points. Never before has the market fallen that far, that fast. It now appears a trading error caused P&G's stock to be priced incorrectly. The market recovered a bit later but the Dow was still down over 3% for the day.Fear had returned - front page. It had been hovering about for weeks, as the debt crisis in Greece became more serious and seemed to threaten the financial stability of other European countries (Portugal, Spain, the U.K.). Now, on the street, and in the media, fresh and still very painful memories of 2008 and Lehman re-surfaced. It was palpable. It still is, as the Dow surged over 400 points yesterday (May 10) in relief upon news of a massive European Union bailout plan.

In my mind, I've been hearing an audio recording of Franklin D. Roosevelt's famous inaugural line as he entered the Presidency in early 1933 in the depth of the Great Depression: "...the only thing we have to fear is fear itself." I imagine many who heard FDR that day were saying to themselves, "Sure, easy for you to say. You're rich and you're the President." Investors today, especially those who are counting on their portfolios to help fund their retirement, look at market volatility in recent years and wonder if their futures are tied to nothing more substantial than a casino bet. Of course they are afraid. Who wouldn't be?

Yet FDR's point was aimed at our reaction. Read his complete sentence: "So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself-nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance." Why we need to fear "fear itself" is because it often either paralyzes us, or causes us to react inappropriately. Quite literally, as investors we fail to "convert retreat into advance" in the markets.

Looking at this a little more closely, consider that a primary cause of the recent woes in our financial system is burgeoning debt - too much debt, offered too easily to too many, for quick profit along with excessive risk. Indiscriminate mortgage lending morphs into mortgage-backed investment securities sold round the world. Individuals, organizations, and countries are all overburdened. Now consider what investors do when they fear for the stability of this system. They sell their stock (and thus their stake in many solid, substantial companies) and buy more fixed income, usually government bonds. They buy the debt that is strangling us all. This is called the "flight to safety." Yet, would you feel safe today buying bonds issued by Greece? Portugal? Maybe even the U.S.?

Now, there are obvious reasons why short-term traders charge in and out of the markets seeking, often unsuccessfully, to dodge the very bullets they themselves are creating. They are speculating, not really investing at all. Yet for long-term investors such a strategy is arguably the equivalent of financial insanity.

At First Affirmative, we counsel our socially conscious investors to develop a reasoned, risk-adjusted investment strategy that reflects their values and is appropriate to their long-term goals and dreams, and to stay with that strategy, especially when fear is in the air and in our guts. We do this in part because the "flight to safety" is ultimately a mirage. We do it because the portfolios we design for our clients are invested in the kind of sustainable economic system our world is moving toward because it has to (and so that is where the long-term return will be). We do it because charging in and out of the market out of fear is a casino bet - the fear of fear itself.

*Mention of specific securities should not be considered an offer to buy or sell that security. For information on the suitability of any investment for your portfolio please contact your investment adviser.

^Indexes are unmanaged groups of securities and are not directly available for investment.