When faced with a seemingly insurmountable challenge, it’s tempting to stick one’s head in the sand like an ostrich, and hope it goes away. Some have said that about U.S. politicians when it comes to the nation’s $1 trillion deficit. The ominous-sounding combination of automatic spending cuts and tax hikes dubbed the “fiscal cliff,” a precipitous plan deadlocked politicians put in place last year, has the U.S. on edge. How do we feel standing at the edge of a cliff? Is there an urge to back away? To jump? To build a safe passage across the abyss? Set to go into effect on January 1, 2013, it remains to be seen what—if anything—Congress will do to change or delay these measures, and what longer-term solutions to tackle the deficit will be put forth.
Dr. Michael Hasenstab, Templeton Global Bond Fund portfolio manager and co-director of Franklin Templeton Fixed Income Group’s® International Bond Department, doesn’t prescribe legislative answers, but he can relate the fiscal challenges the U.S. faces to the experiences of a country with its own dramatic cliffs: Ireland.
Many people are programmed to assume the consensus view is the correct one. They see a particular movie based on a number of positive reviews, buy a particular phone because people have camped out in front of a store to get it, or change their hairstyle based on the latest fad. It’s extremely hard to go against the crowd, even if you can’t afford that fancy new phone, or that new hairstyle isn’t actually so attractive on you. It may be easy to laugh off falling prey to a gadget trend or a hairstyle, but what happens when it’s your investments that have been trampled by following the herd? Being hard-wired to follow the herd probably serves some evolutionary survival purpose, but when it comes to investing, mustering the strength to break from the crowd may actually be the superior survival technique. We continue our exploration of behavioral finance with the concept of “herding” as it applies to investing.
Some key thoughts:
- Following the crowd often means buying when prices are too high and selling when prices are too low.
- Value-hunters may be able to find equity bargains when others are moving out of equities.
Think about something you’d really hate to lose, something of value to you such as a treasured possession. Now imagine you’re told that if you lay that object on the line in a bet, you have a good shot at doubling its value, but there’s also a possibility you’ll lose it. How low would the chance of loss have to be before you’d be willing to take the risk? Maybe 10%? Less than that? The answer may lie in a behavioral economic theory called “loss aversion.” Read more…
Anyone who took an introductory psychology class probably remembers the classic study in which different people witnessing the same crime each report a different take on what happened. Though each presumably sane, sober person witnessed the events with his or her own two eyes, individual expectations and biases influenced how they perceived what happened. Sure, you say, but what does this have to do with investing? Well, it turns out that our individual expectations and biases influence how we view investments, too.
- Our thinking is often strongly influenced by what is personally most relevant, recent or dramatic.
- Fear may be driving investor decisions more right now than reality.
- As the yield environment has shifted, many investors are faced with a choice of either changing their goals or changing their approach. Read more…
It’s tough to be patient in an age of instantaneous communications and instant gratification. We all want immediate answers to our questions and quick fixes to our problems. When it comes to real world tangles like the global economy, though, Chris Molumphy, CIO of Franklin Templeton Fixed Income Group®, reminds us that patience, not a magic pill, is the order of the day when it comes to European and U.S. struggles to cure their economic ailments. He’s realistic about these problems—but isn’t waiting to act where he does spot investment opportunities.
The European Central Bank (ECB) and the U.S. Federal Reserve have been firing a number of monetary policy bullets to jolt their respective economies, but investors seem to have grown impatient with what is widely regarded as sluggish economic recovery. Molumphy puts the challenges both the U.S. and Eurozone have been facing in perspective.
His key opinions, in brief:
- We’re very concerned that the inability of the U.S. to deal with its debt problems could negatively impact the markets sooner rather than later.
- Monetary policy is important and can be effective in the short term, but is not designed to work over an extended period of time.
- Growth in Europe is anemic at best; it’s flat to slightly negative currently, and we don’t see much growth at all in Europe over the next couple of years.
- Broadly speaking we currently see opportunities in the fixed income marketplace in three areas: corporate debt securities, municipal bonds and global fixed income. Read more…