Fear and Greed on Wall Street


A recent online article from CNN Money titled "Fear and Greed Index" (index that measures the investor's fear or confidence while in the market) illustrates an accurate description of what is happening on Wall Street. Because of the recent volatility stemming around Greece and the Euro, and unemployment domestically, the fear and greed index for investors is all the way in the red (extreme fear). This means that investors as a whole do not put much faith in the outcome of their investments. Bottom line, volatility has become a normal event investors are unwilling to tolerate moving forward.

Why is this happening? It's simple, most investors' retirement and financial goals have been severely disrupted over the last 10 - 12 years. They have to make up the losses and know that a volatile marketplace will not get them where they need for a secure retirement. Unfortunately, this trend is likely to continue and many portfolios will continue to suffer losses like we have seen over the last few years.

The fear and greed index shows extreme fear for investors in every category. Every aspect of investing is being marked as red, from junk bond investing to safe money havens. At first glance you would think that safe money havens would put investor fears to rest. This is not the case. Wall Street's safe money havens are quite different from other Safe Money Vehicles (non-Wall Street affiliated products). On Wall Street, a safe money haven usually refers to either commodities such as gold and silver, which can be volatile, or FDIC insured accounts (i.e. money market accounts) that will usually earn 1/10th of 1% interest. Because Wall Street designs their business model around non-guaranteed leveraged assets, their safe money havens are either susceptible to loss of value (exposed to market volatility) or are accounts that basically break even (usually FDIC insured), exposing your money to inflation risk.

Make no mistake about it, the reason the fear and greed index is so high is because in the market, investors have no guarantees in place in order to achieve their long term goals. With non-leveraged assets (assets with a minimum leverage ratio of 1:1) you can provide a moderate return without subjecting your money to volatility through a unique concept known as annual reset. Annual reset is a regulated concept (financial products protected by law) that will ensure you will never take a step backwards due to excessive volatility.

There are millions of investors who have taken advantage of annual reset in order to protect their money from volatility. Those who implemented this philosophy prior to 2008 never lost a penny in the financial crisis when Lehman Brothers fell (at that time Lehman Brothers was leveraging their assets on a ratio of 33:1), and have experienced moderate returns since that point in time. These investors understand that regardless of how the market performs they have underlying guarantees that offer lifetime income or tax advantaged withdrawals (for those who qualify) that will avoid volatility and allow for moderate returns.

Never heard of these financial products? There is likely a good reason why. Financial planners often fail to make recommendations to products that use annual reset (offering financial guarantees) because they deem it a conflict of interest. Financial planners are in the business of hedging against risk, not proving total protection from risk. These philosophies differ by the way the planning phase (usually based on how institutions leverage their assets) is approached in both long term and short term goals. Annual reset is tied to products that do not offer securities, which is often interpreted as a lack of control by financial planners.