What do we fear and why regarding investments, and how does this fear impact the performance of financial professionals whether as fiduciaries or as asset managers?

Those existential questions posed by Barry Ritholtz began a session on Thursday at the Morningstar ETF Conference in Chicago that took a winding yet entertaining path filled with similes and market charts to illustrate his answer.

Before delving into the markets, Ritholtz, co-founder and chief investment officer of Ritholtz Wealth Management in New York City, asked the question of why people fear sharks when, at least according to statistics from 2015, more people around the world were killed by taking selfies (12) that year than by sharks (8).

“That goes to show that anything that’s big and visceral and emotional and looks good on TV will capture our attention even if statistically it’s not a significant source of how actual deaths appear,” he said.

The same goes for terrorism, which Ritholtz emphasized he wasn’t making light of but noted that it’s something that produces an emotional response. But according to the Centers for Disease Control and Prevention, people are 35,000 times more likely to die of heart disease and 34,000 times more likely to die of cancer than they are from a terrorist attack.

“The parallels with your portfolios are the same. It’s not the big scary things that will get your portfolio and it’s not the big scary things that will get you,” Ritholtz said. “It’s probably the high cholesterol and high blood pressure. But what we’re afraid of is the big, emotional visceral events that we see on TV.

“What we always need to keep in mind is that emotional decision making makes for bad decisions and bad outcomes,” he added.

Whether if relates to sharks or terrorist attacks or investment portfolios, you have to look at the numbers and put them into context, said Ritholtz, who proceeded to list the things that investors are afraid of concerning the markets. Tops on the list are the fears of market crashes, hyperinflation and the collapse of the dollar. And those fears are often heightened by a steady drumbeat of negative reports in the media, such as during the financial crisis of ’08-’09. 

“When you were presented with what could be described as the best opportunity in our lifetimes to buy stocks, all the news reports were completely negative,” Ritholtz said.

He called up a chart showing all of the significant declines in the S&P 500 Index during the past century, of which there are about 25. “Anybody who says they don’t want to put money into the market because they think it’s going to crash should never be in equities because the market always crashes, there’s always a 20 percent correction coming because based on the past century there’s one on average every five years,” Ritholtz said.

“If a client says to me, ‘I’m concerned about a market crash,’ my answer is if you’re under 50 you should be rooting for a market crash because it would be nice to buy stocks that are 20 percent off, and then go 20 years to compound that discount,” he said. “Or if you’re much older than that and you’re concerned about volatility and market crashes, then you shouldn’t be in stocks and you should significantly lower your expectations for future returns.”

Next, Ritholtz showed a slew of headlines subsequent to the stock market’s dramatic upturn since the depths of the financial crisis in March 2009 that have proclaimed that a crash is nigh. Yet the markets have kept climbing—with a few brief drops sprinkled in—during that time. If those headlines filled you with angst and you decided to unload your equities based on those reports, you would’ve cost yourself a lot of money, he noted.

When a client came to him saying he wanted to sell everything because he read that billionaire hedge fund manager George Soros was buying put options, which are a bet that the underlying securities will fall in price, Ritholtz replied, ‘Of course he is, and if you were worth $27 billion like he is you’d occasionally buy puts to ensure some of your holdings.’

In addition, Ritholtz noted, some people make emotional decisions about their portfolios based on the political situation.

“In 2003, all of my Democratic friends and hedge fund buddies on the left were telling me that the Bush tax cuts were terrible and would blow out the deficit, would blow out jobs and would be terrible for the stock market. But we had a 90 percent rally over the next four years,” he said. “But Republicans shouldn’t laugh too quickly because fast forward to 2009 when President Obama was painted by some as a Kenyan Muslim socialist, so avoid the markets at all cost.”

Yet the stock market has tripled since the early days of his first administration.

Bottom line: politics and investing don’t mix.

“Anytime a client calls up to complain about whoever it is—lately it’s Trump and before that it was Obama—we send them one of these charts [showing the performance of the markets during the Bush and Obama administrations] and say, ‘Which of these charts do you like better . . . do you like the one where you’re out because a Muslim is elected and the market triples, or do you prefer the one where you’re out because the Texan is elected and the market doubled,” Ritholtz said.

People make wrong decisions whether its political or fear or whatever, he emphasized, but one way to mitigate the risk of stocks is to build diversified portfolios.

“Whenever someone tells me they don’t want to own stocks because they’re expensive, my answer is, ‘You just don’t own stocks; here’s what you own and here’s how it works,’” Ritholtz said.

And to reiterate a simile used earlier, Ritholtz asked why do investors tend to underperform? “It’s not the market crashes that get them, it’s the cholesterol and the high blood pressure,” he said. “It’s the high fees; it’s a lack of discipline; it’s not sticking to a plan; it’s the trading incessantly; and their investment philosophy is all over the place. They make emotional decisions.

“You have a big advantage over the individual investor in that you’re all part of organizations that can help them manage risks and deliver better performance to clients,” he added in his comments to a room full of financial advisors and money managers.

He told the audience they can provide organizational alpha through their size and ability to negotiate fees, along with having long-term investment horizons, the ability to rebalance portfolios when assets classes go up and down, maintaining a consistent investment philosophy, and having a process in place.

“We have to understand the war between ourselves and our brain,” Ritholtz concluded. “We have to recognize how important risk is in achieving returns, and we have to embrace the appropriate levels of risk. If a client says to you they can’t deal with 20 percent drawdowns, then they shouldn’t be in equities.”