3 Questions Investors Worry Too Much About

July 17, 2015

Markets Are Ultimately Human

Abraham Maslow's famous hierarchy of needs, first introduced in "A Theory of Human Motivation" published in 1943, outlines a popular belief of what drives human psychology. In simple form, humans strive to have their basic needs (physiological) met first, then they move on toward other needs, eventually striving for self-actualization (essentially what the U.S. Army would later describe in its slogan, "Be all that you can be").

Most investors’ physiological needs (air, food and water) are easily met. By definition, they have money to invest, so they have presumably already bought their groceries before buying 50 shares of the next hot Internet stock. Therefore, they move quickly on to safety, Maslow's next need.

Since financial safety is included in this stage, investors sometimes resort to making decisions based on safety, especially in times of crisis. The next stages, before self-actualization, are love/belonging and esteem. At this point in the year, we believe investors are floating between safety and self-actualization.

Vol Of Vol
One example of this behavior is a recent spike in a technical measure called Vol of Vol. Vol of Vol measures the volatility of volatility. If there is a high Vol of Vol, that typically means markets are exhibiting spastic behavior. Represented by the CBOE VIX Volatility Index (VVIX), the VVIX measure of VIX options’ implied volatility (Vol-of-Vol) saw its second-largest daily gain ever on June 29.

There are some market events, like Greece, China and the Fed rate cycle, that touch on an investor’s basic need for safety. On the other hand, low unemployment in the U.S., relatively strong economic numbers across much of the global market capitalization, and attractive valuations for non-U.S. stocks leave investors searching for self-actualization and asking, "Where is my return?". This psychological barbell may be leading to some of the spikes in VVIX.

While there are typically thousands of factors that impact market movements, events in Greece seemed to be a key driver of the pullback. Like Greece, we feel there are countless examples of factors that investors worry too much about, affecting their results over time.

3 Questions Investors Worry Too Much About

While there are many potential examples, we have chosen three relevant areas where investor behavior may currently be playing too big of a role:

  • Should I be trying to beat the “market”?
  • Should I take a big bet on interest rates?
  • Should I be worried about the length of the current stock market rally?

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