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Investors Find Fear Everywhere

Stocks, bonds, and even cash are making them nervous these days.

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One of Warren Buffett's best-known pearls of wisdom is "be fearful when others are greedy, and be greedy when others are fearful." It's a quote intended to guide stock investors about when to buy and when to sell. But when it comes to investing, fear can take many forms, including the fear that high-flying assets will come crashing back to earth.

Last week, we asked readers on our Personal Finance discussion board about their investing fears and, in particular, what's the scariest thing in their portfolio. The wide range of responses was indicative of the current investing climate, with many unsure what to do amid an aging bull market for stocks, the potential for rising interest rates in the coming year, and low current rates that offer little reward to savers. Some said that individual stocks they own or sector bets they've made make them fidgety, while for others concerns that rising interest rates will hammer their bond holdings were paramount. A few even said that cash--of all things--was the scariest holding in their portfolio. Then there were those who said no part of their portfolio was scary to them, that they were well diversified and ready for what may come. But most responses support the notion that these are uneasy times for many investors.

You can read all the responses by clicking here. Below are some excerpts.

Worried About a Stock Shock
In a few cases, it was individual stock holdings that gave investors the willies. Two tech names, in particular, came up more than once.

"I'm seriously overweighted in one stock:  Apple (AAPL)," said tbeatty. "I know better, but I'm currently a slave to emotional attachment and a fear of realized gains."

For shieldscr, the big concern is  Amazon.com (AMZN). "It does not look like it is ever going to make money. Does the emperor have clothes on?" the commenter wrote.

Meddguy also listed the online retailer among his scariest holdings.

"I have a number of scary investments," he wrote. "They include [a mortgage real estate investment trust], Annaly Capital Management (NLY), a business development company, Fifth Street Finance (FSC), and [oil company] LinnCo (LNCO), but the most scary for now is Amazon. I bought it a long time ago, and watched it grow. But now my faith is being shaken. It seems that they are taking a shotgun approach to investing the shareholder's money for the future. One example of this is their cell phone disaster, the Fire Phone. Maybe they should stick with what they do best."

Another oft-mentioned "scary" holding was  Fairholme (FAIRX), the highly volatile, highly concentrated large-value fund run by manager Bruce Berkowitz. After finishing each of the last two years as a top performer in its category, this year it's one of the worst.

Among stock sectors, energy was a popular choice.

"Based on the last two months, my energy-natural resources fund [is scary]," wrote dawgie. "Up until August, it was one of the best performing funds in my portfolio, until it started dropping like a rock. Fortunately, I rebalanced before the drop and captured some gains before the plunge."

Bacholyte said, "Probably the scariest parts of my portfolio are the leveraged CEFs [closed-end funds], although they are not a large portion of the whole. Those in energy-sector MLPs [master limited partnerships] are surprisingly volatile considering that the payout on the underlying MLPs is presumably steady." 

Meanwhile, SeanDWB was among readers looking overseas for investment ideas, but not without some trepidation.

"I recently got out of some emerging-market funds featuring BRICs [Brazil, Russia, India, and China] and into more frontier-market and non-BRIC emerging-market small-cap ETFs," the commenter said. "While I think the funds are well-administered, the fact that they are frontier markets and mostly dependent on their domestic economies makes my heart jump a little when I hear bad news about the macro-economic environment."

Maybe Not So Golden After All
Several investors homed in on precious metals when naming their most harrowing holdings. Skyliner was among them.

"SPDR Gold Shares ETF (GLD) in a Roth," he answered, mentioning an exchange-traded fund that owns gold. "Bought it when I thought it went as low as it could go, but then it kept dropping. It dropped again after seeing it try to recover. So now I wait for another upturn/downturn, anything but stagflation."

Evolence was in a similar predicament, saying his or her scariest holding is "ETFS Physical Precious Metal Basket Shares (GLTR)-- an ETF representing a basket of precious metals (gold, silver, platinum, and palladium). Honestly, it's such a small part of my portfolio that I'm not scared by it. But relative to other holdings, I have never heard any commentator or economist who is able to assign a 'rational' value to gold (the largest holding). So valuation is questionable, and metals have been in a downtrend the past couple of years (maybe a good time to buy?). Then there is the fact that inflation is tame and the dollar could become stronger. I question if any positive return can be had at all, much less a positive real return net of expenses. But for all the negatives, it is more of a play on an uncorrelated asset that will zig when others zag."

Broad-Based Fears
But for jomil, it wasn't any single security that's causing him or her to lose sleep. Rather, it's the possibility of a broad sell-off.

"After thinking about it, the scariest possibility is everyone heading to the exits at the same time, as in 2008," the commenter wrote. "What [was] safe then is probably not what my assets are in now because of low interest rates."

Myshkin also sounded alarmed by the current environment for investors, saying he or she is afraid of "pretty much everything! Stocks are reasonably valued only by comparison with bonds, and Fed policies make it impossible to assign a rational value to bonds for comparison. Pick one? The scariest thing may be emerging market securities. On the other hand, they may be the only thing that is fairly valued! The last time I felt this way was 2008."

For some readers, it wasn't so much the investments themselves as distrust of the financial system in general that is the biggest cause for concern.

Jimmy2ds wrote, "I am 76 and following Josh Peters' dividend investments for income. My portfolio also includes a few mutual funds. The one which is most scary is Fairholme. However, what is the scariest to me is not my portfolio but the financial institutions who have, in my lifetime, done serious damage to our economy. These supposedly educated people have made some very stupid decisions, out of greed for self, with little concern for how these decisions affect the country as a whole."

And if the state of the markets weren't disconcerting enough, povdds said what's scariest to him or her is "the fact that my unbreakable password, not to mention my investments, are in the digital vault of an investment firm that has probably been hacked by a teenager from Bucharest."

Wary of Bonds--and Cash
Fixed-income investors are not immune to the fears prevalent in the market today. With the Fed expected to begin raising interest rates--a move likely to reduce the value of existing bonds--as soon as 2015, many bond investors are wringing their hands and wondering what to do.

"Like many others, bonds are my scariest holdings," said George1. "I have a 50/50 [stock-bond] mutual funds allocation. When interest rates go up I may take a beating."

Kenepp1 wrote, "I am 72 and retired. With a bear market on the near horizon, bonds are usually the safe harbor. Not now with interest rates almost assuredly soon to go up."

"I've been a little worried about bonds for a few years now," said Mustang. "Everyone says that at my age I need a greater percentage of bonds but I don't feel that way. Interest rates can't stay this low forever. I've been reducing my percentage of bonds and moving from conservative-allocation funds to moderate-allocation funds."

Even cash--seen by many as the safest of all investments--has those who fear it, such as Aquinas.

"What scares me is the cash," the commenter wrote. "A couple of years ago my wife and I came into a substantial amount of cash (about 15% of our total portfolio). We've always been gradual accumulators, contributing regularly over the years to our retirement accounts, holding nearly everything in equity and bond funds. With the market climbing and looking overvalued, when the cash came our way we just put it in a savings account. Since then inertia and fear of another 2008 have caused us to keep the money on the sidelines. We don't see any good investment options for money we might need in five years or so when we plan to retire. At the same time, holding that much cash is scary because of what inflation is doing to it and--worse--what inflation could do to it in the future."

To hear some other readers tell the tale, having cash on the sidelines, especially while the market has been setting new record highs, has been downright painful.

"Too much cash sitting in awful-paying, but safe, accounts," said BoomerGuy. "Market is too high to buy; not making any real return with cash! Can't make up my mind what to do!"

But not everyone was down on the idea of holding a large allocation to cash. To proxysteve, it's a good problem to have.

"If I worry about anything it's not having enough cash right now," he wrote. "While I do not think the market is frothy, a panic-driven sell-off can happen at any time. It's always comforting to have dry powder to use when stocks are cheap. It scares me that I won't have enough cash when I really want lots of it."

Retiredgary summed up the fears of many investors nicely, saying, "Everything is scary. If a person holds only stocks he faces the risk of big bear markets. If he holds only bonds he faces the risk of losses due to rising rates, taxes, and inflation. If he holds only cash he risks the declining purchasing power of the dollar. If he holds only precious metals he faces the risk of very large volatility in prices and the certainty of unfavorable tax treatment. ... The only way I have thought of to deal with all this is by serious diversification both in regard to assets and to types of accounts. That makes things a little less scary, though still scary enough."

Nothing to Fear But Ourselves
Last, it should be noted that a large contingent of posters on our comment board said that the biggest threat to their portfolios was, in fact, themselves.

"In short, I am the scariest thing in my portfolio," Nittwit said. "Will my ability to earn income stop? Will I change my portfolio from a winner to a not-so-good or less? Still, as always, I prefer my decisions to so-called investment experts. This does not mean I do not listen to what they are saying."

"My portfolio is fine. It's the bogeyman in the mirror that concerns me," wrote sschullo. "Always has, and that's why I have a conservative portfolio with 35% equities and 65% bonds."

Even for younger investors, with longer time horizons that should allow them to ride out whatever market turbulence may lie ahead, these are nerve-racking times.

"The scariest thing in my portfolio is the button that lets me buy and sell. I'm much more afraid of me than I am of the markets," wrote District. "My wife and I are in our early 30s and our retirement savings is invested 100% in equity index funds (split 70/30 domestic/international). What I worry about the most is how I respond to the next big downturn. I'm happy with my asset allocation plan, and I have a lot of confidence that I can stick with it. But I still get scared because of all the financial press that tells me I'm going to freak out when the portfolio loses 40% of its value. I did okay last time, but I didn't pay as much attention. We had accumulated enough in 2009 for it to hurt a bit when the portfolio balance shrank. But I didn't really know what I was doing at the time, didn't pay as much attention, and had a somewhat more forgiving asset allocation. I was more confused than frightened.  Since then I've learned enough to be able to be stupid. And that scares me."

Comments have been edited for clarity and brevity.

Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.