Investors Fear Market Crash, But Aren’t Doing Anything About It

It's a tale of two moods for stock market investors, according to a new study.

Nearly 75 percent of market investors fear a “big” correction, but few are taking concrete steps to protect their assets, seemingly afraid of missing any of the rising values.

The Global Atlantic/Ebiquity survey found that 74 percent of U.S. investors age 40 years and older are concerned about a stock market correction.

Those investors favor income and capital protection investments, but are still overweight in equities, the survey found.

“Investors felt the pain from the 2008 financial crisis, but our study indicates many are not prepared for another significant downturn and the impact it could have on their retirement,” said Paula Nelson, president of retirement services at Global Atlantic.

Investors clearly need a better strategy to protect themselves from future market corrections and volatility, she added, especially as they enter their peak earning years and prepare for retirement.

“The study found investors were over weighted in the stock market and not prepared for a sizable or prolonged downturn,” Nelson said.

More importantly, two out of three investors still in the workforce said a significant downturn would disrupt their retirement plans and timing, she said.

Many investors think a correction has to happen because one hasn't happened in
so long, experts said. But protecting against a downturn means sacrificing gains.

“If an investor is concerned, they should accept the cost of protective
investments,” said Kevin Kleinman, founder of Watchhimtrade.com. “Protective investments take up allocation in a portfolio that has performed best by having maximum long exposure.”

One of the most cost effective and efficient ways to protect a portfolio right now is by buying put options, which rise in value exponentially when markets fall, Kleinman said.

“Volatility, and the price of puts, is about as cheap as it has ever been,” he noted. “If a correction comes out of nowhere, you’ll be happy to have some short market exposure, even if it's only a one percent allocation.”

Don't Try to Time the Market

Inevitable market downturns, too unpredictable to time with any reasonable certainty, are the very reason for some more traditional asset protection ideas: dollar cost averaging (DCA) and portfolio rebalancing.

“Most investors tend to be either eternal optimists who believe that they can see the downturn right before it happens, or those who admittedly know little about investing,” said Rob Drury, executive director at Texas-based Association of Christian Financial Advisors. “The basic principles of dollar cost averaging and rebalancing help to rescue both of these groups from themselves.”

Dollar cost averaging simply means systematically and consistently investing in increments over time. It guards against putting too much money at once into a particular investment, Drury explained.

“As an investment is rising in value, more funds are being placed into it,” he said. “As the value is falling, more shares are purchased at lower prices, positioning the investor for gains once the investment turns around.”

Periodic portfolio rebalancing results in an automatic buy/sell function where gains are sold off to buy into other investments at their lows, Drury added.

“While many are critical of these techniques, stating that they deny the investor the opportunity for maximum gains, they are automatic functions that significantly reduce market risk as well,” he said.

Most investor portfolios also have – or should have – a protective, fixed-income component, as well, said Ben Westerman, senior vice president at HM Capital Management in Clayton, Mo.

“Keep in mind that your entire portfolio is not invested in the stock market,” Westerman said. “A segment of your portfolio is invested in bonds, which usually increase in value during a bear market. Bonds are your sleep-at-night money that is protected during a bear market, while you wait for your investment portfolio to recover.”

If an investor has any money on the sidelines, or are still in the accumulation phase of life, there’s a great opportunity after a stock market correction to invest in equities while stocks are on sale, Westerman said.

'Closer to a Downturn'

That’s not to say investment experts don’t believe the stock market will correct, and possibly do so in major ways. The larger point is why investors don’t seem to be prepared for that eventuality.

“The stock market is quite high and, in my opinion, we continue to edge closer to a downturn,” said Clifford Caplan, a financial planner with Neponset Valley Financial Partners in Norwood, Mass.

Caplan takes a portion or all of the gains in a position off the table and re-invests the proceeds into investments that have under-performed, but show great promise.

“However, I always allocate a portion of the portfolio to alternative investments that include managed futures, long/short funds, global absolute funds and gold,” he said. “Generally, I allocate 15-to-20 percent of a portfolio to alternative investments.”

The main reason investors don’t take concrete steps to protect their gains can be related to behavioral finance.

“Investors who have significant gains do not want to cash out too quickly and believe that they can time the market to get out near or at its peak,” Caplan said. “Investors who missed the boat and panic and jump generally much too late but, in the short term, may continue the upward momentum of the market.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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