The crooks can't fool this 65 year old anymore.
Main Street to Wall Street: We don't buy the rally
Main Street to Wall Street: We don't buy the rally; small investors steer clear of bull market
.By Bernard Condon, AP Business Writer , On Friday January 8, 2010, 6:42 pm
NEW YORK (AP) -- Edward Shook can't resist a bull market.
He rode the one in the late 1990s and lost $350,000 in the dot-com collapse. Shaken but optimistic, he bought into the bull market that followed -- and lost another $350,000 from his portfolio's peak when stocks fell to a 12-year low in early 2009.
Now the 65-year-old roofing contractor from Raleigh, N.C., says "he's getting smart for a change." Even though the Standard & Poor's 500 has climbed 68 percent since March, Shook is largely leaving the stock market "to the crooks that run" it. He's sold shares and bought bonds instead, with no regrets.
Millions of other Americans are steering the same course. After being key players in bull runs of the past, small-time investors have not only stopped buying, they're selling. The question for the new year: If the man on the street doesn't jump back in, will stocks continue to defy gravity?
So far, the market's comeback is almost entirely due to buying by professional investors at hedge funds, pension funds, banks and other institutions.
"We've never seen this before -- such a huge rally, and the little guy is out," says Vincent Deluard, a strategist for TrimTabs Investment Research, a Sausalito, Calif., firm that tracks mutual fund flows to get a sense of what individual investors are doing.
Mutual funds are a good proxy for such investors because more than three-quarters of fund assets are held by individuals, both directly and through retirement plans.
Small investors yanked a net $14 billion from stock mutual funds from the beginning of last year through mid-December. That's on top of a net $245 billion withdrawn in 2008, according to TrimTabs.
The firm says most of $592 billion taken out of money market mutual funds last year has gone into bond and bond-hybrid funds instead.
Some bulls say ordinary folks are likely to start buying again soon, given the encouraging economic news lately. Others are not so sure, and fear that if investors drag their feet much longer, stocks could flatline.
According to the Federal Reserve, individuals held 80 percent of the $19 trillion in stock in U.S. companies, both private and public, at the end of September. That means they can have a big impact on the market whether they own the stock directly or through mutual funds.
There's also a third view, a decidedly bearish one that's sure to delight anyone who's ever felt taken by a pushy broker or an optimistic analyst report or cheerleading by financial journalists: Maybe, just maybe, the little guy is right to be shunning the market now, and it's the experts who are wrong.
"People have been lured into two bubbles seven years apart, and for a lot of them it's over," says David Rosenberg, chief economist at Toronto money manager Gluskin Sheff. "The bulls say if the market is up this much without retail investors, just watch when they come in, but it isn't going to happen."
Rosenberg says investors who have not been spooked or angered by the market are probably too poor to buy anyway. The Investment Company Institute says 5 percent of the 24 million 401(k) investors it tracks stopped contributing to the plans through the first nine months of last year, 1.3 percentage points higher than in all of 2008.
It's impossible to say how much that drop is due to disaffection with the markets or to strained household budgets.
Vanguard, the big mutual fund company, says it expects a similar dropout rate in its 401(k) programs for 2009 when all the year's numbers are tallied. It notes that most investors are sticking to plan, though.
Only 11 percent of its 401(k) customers shifted investments among funds in the first nine months last year, lower than the average this decade. It says the moves showed a slight shift to bonds.
Bears say a pullback, combined with a new distaste for stocks, could drag returns down for years and change the way we see stocks: more as vehicles for throwing off dividends, as they were valued in the past, than as a route to riches.
If Main Street is correct in anticipating this, it will be a rare flash of prescience.
In the year following the October 1987 crash, investors pulled $20 billion out of stock funds, missing a big snapback in prices, according to data from TrimTabs. Then they made the opposite mistake, putting $22 billion into the market in the year before the start of the early '90s recession and market drop.
Burned by the 2000 dot-com bust, they pulled $81 billion from stock funds in the last six months of 2002, according to TrimTabs. The S&P 500 returned 29 percent the next year.
Individuals have a lot riding on the funds. Nearly half of households that own mutual funds have three-quarters or more of their financial assets tied up in them, the Investment Company Institute says.
"The typical investor gets it dramatically, persistently wrong," says Larry Swedroe, director of research at Buckingham Asset Management in Clayton, Mo. "He buys high and sells low -- and that's a dumb strategy."
As if that's not bad enough, Swedroe says, investors often jump in and out of the market via actively managed mutual funds.
The idea is to leave stock picking to the experts. The problem is, there's no proof the professionals can consistently outperform the market, at least not ones running mutual funds.
University of Maryland finance professor Russ Wermers studied 2,076 funds over 32 years through 2006 and found that actively managed stock funds underperformed passive index funds by a risk-adjusted 0.97 percentage point a year, after accounting for fees.
Swedroe thinks investors blew it by bailing out earlier this year only to miss the biggest run-up since the 1930s. TrimTabs' Deluard notes they may have compounded that mistake by piling into bonds that will drop in value should interest rates rise this year as the market expects.
Mike Pickett of Stockbridge, Ga., made the switch from stocks to bonds recently. After losing $500,000 in six months, he unloaded stocks near the market low early last year. Stocks now comprise 50 percent of his portfolio, down from 80 percent.
"I was panicked," says Pickett, 67, a restaurateur. Still, he says, he has no regrets. "I'm sleeping at night."
Bad timing notwithstanding, there are strong arguments for continuing to stay away from stocks.
For starters, stocks are up because of unprecedented fiscal and monetary stimulus has helped push them there. What happens once it's gone? Rosenberg, the Gluskin Sheff bear, says the market could lose a third of its value once the government props are kicked away.
Jeremy Grantham, 71, the founder of Boston money manager GMO who warned that housing and stocks were widely overvalued a few years ago, thinks investors should tread carefully. According to his latest letter to clients, he thinks the S&P is fairly priced at 860, nearly a quarter below where it's trading now.
Shook has a scary figure of his own keeping him on the sidelines: that $700,000 he lost.
"It's like investing in Bernie Madoff," he says of the stock markets. "Anyone not putting money into stocks has it right."
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