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Gregg Fisher, president and chief investment officer of Gerstein Fisher investment firm, right, and Philip Z. Maymin, an assistant professor of finance and risk engineering at Polytechnic Institute of New York University, at the Gerstein Fisher Research Center in New York, March 9, 2011. New research into 17 years of call records at a boutique investment adviser shows that there is likely hood in all of us is likely to buy or sell at the worst possible time.

Alan Zale, New York Times

Past turmoil leaves a lasting impression on today's investors

  • Article by: PAUL SULLIVAN
  • New York Times
  • January 5, 2013 - 4:11 PM

If there was one word that applied to investing in 2012, it was uncertainty.

But there were different kinds of uncertainty. To paraphrase Donald Rumsfeld, the former defense secretary, last year there were uncertain uncertainties and certain uncertainties. Some of the uncertain uncertainties were the European debt crisis, China's handling of its stalled growth and leadership transition, and the U.S. presidential election.

The fiscal-cliff negotiations were a certain uncertainty. No one I spoke to throughout the year thought the talks would be concluded in a tidy fashion with weeks to spare, and they were certainly right.

"There has been a lot to worry about," said Gregg Fisher, president and chief investment officer of Gerstein Fisher, a wealth management firm in New York. "The other problem with uncertainty is we're worried about what other people are worried about. This creates a huge amount of uncertainty without a path."

Despite the worry, stocks in the United States had a good year, with the Standard & Poor's 500 delivering a total return of 16 percent, including dividends -- despite some steep declines in December.

More than that, Neeti Bhalla, head of tactical asset allocation at Goldman Sachs private wealth management, pointed out that 2012 was the first year since 2009 in which the large-cap index did not drop below its starting point for the year, 1,258.

"That was important because at no point this year did people feel a negative return in their equity portfolio," Bhalla said. "You had pullbacks ... but you never got to a negative experience."

So what did investors do in a year that was full of uncertainty yet actually quite strong in terms of returns? The opposite of what they should have done: Measurements of cash flows showed that investors took money out of equity funds while continuing to put money into fixed income, even though financial advisers were concerned that a slight drop in the price of bonds like Treasuries could quickly result in investors losing money.

"They were looking for stability in the fixed-income markets," said Barbara Reinhard, chief investment strategist for Credit Suisse Private Bank. "The big thing is investors held onto the recent past and couldn't get out of their own way."

Of course, even the professionals would not fault the average investor for being scared by so much uncertainty. Chris Blum, global head of equities at J.P. Morgan Private Bank, said he liked to show clients a series of charts of stock returns over many decades. The trend is up despite periods of declines. But he knows that's not enough to persuade them.

"I can show this kind of data in front of an individual 10 times until Sunday, but the reality is you're not getting in touch with people who are scared," he said. "You need to acknowledge how they feel.''

So how should investors have looked at 2012? Much of the advice came down to two themes: The world won't end, and politicians eventually will come up with a fiscal agreement.

Fisher said he tried to show clients that markets generally do a good job of factoring in risk.

"The return we expect to earn on stocks is higher when the risk we perceive is higher and lower when the risk we perceive is lower," he said. "This is simple, but investors always seem to do the wrong thing."

As examples, he said, Europe's economic problems seemed unsolvable in the first and second quarters, and there was speculation that Greece would leave the euro. Large companies in Europe were paying significantly more to borrow money than their counterparts in the United States. Fisher said this was a great investing opportunity that many people missed because of their concern over political and macroeconomic matters.

Shlomo Benartzi, a business professor at the University of California, Los Angeles, and the chief behavioral economist at Allianz Global Investors' Center for Behavioral Finance, said that investors' confidence had been shaken by volatility in the markets and so much uncertainty around policy decisions.

"I don't think we've had so many times when markets are so volatile and everything is going up," he said. "It would be interesting to ask people what percentage think the market went up this year vs. down. I think a lot of people would think the market went down because they confuse the volatility and the bad news."

Bhalla said that one of the big problems was just how strong the pull of the recent past is on investors. And since the past five years have not been great, investors may be caught in a feedback loop of fear.

"The most important difference from 2012 to 2010 and 2011 is that expectations have been set lower,'' she said. "People have been surprised by the upside."

The only certainty for 2013 is something will happen that no one planned for.

"This illusion that everything is OK is always an illusion," Fisher said. "Life is full of uncertainty."

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