Why Investors Are Sitting on Their Hands
Since the market began its big run back in March, everyone’s been waiting for individual investors to jump back into stocks.
Well, they might as well wait for Godot, because it isn’t going to happen soon.
Traumatized by the crash of 2008-2009, individuals’ new mantra is ABS—anything but stocks. They’ve poured hundreds of billions of dollars into bond funds and a relative pittance into equities, in what amounts to a massive restructuring of their portfolios. Like American consumers, US investors have hunkered down and “reliquified” their assets to reduce risk.
According to Charles Biderman, chief executive officer of TrimTabs Investment Research in Sausalito, Calif., investors have put over $50 billion into stock funds since March, divided about equally between domestic and international funds.
But during that same period, they’ve shoveled almost $200 billion into bond funds as the Standard & Poor’s 500 index has soared nearly 60%. So far in 2009, he says, investors have poured an amazing $251 billion into bond funds. (The Vanguard Group alone has seen $51 billion flow into bond funds this year.)
Contrast that with the last gasp of the Internet bubble in early 2000, when equity funds took in $33 billion a month.
The memory of that crash and the reality of the current one have merged to leave investors shell shocked. Two vicious bear markets in less than one decade are proving too much for many people to handle.
“Twice burned, third time shy?,” Biderman asks.
Indeed, financial planners I spoke with have seen a major change in their clients’ outlooks.
“Folks were aghast at how quickly they lost money,” says Marilyn Capelli Dimitroff, president of Capelli Financial Services in Bloomfield Hills, Michigan.
“I think the events of the last year have altered individuals’ risk tolerance,” says Christopher Cordaro, chief investment officer of RegentAtlantic Capital in Morristown, New Jersey.
Investors in employer-sponsored 401 (k) retirement plans also have cut back their exposure to equities. The Wall Street Journal reported only a “dribble” of money flowing back into stocks this year, but it said “stock holdings in 401(k) plans remain well below historical averages.”
According to Hewitt Associates, equities now comprise 56% of 401(k) holdings, compared with historical averages in the high-60% range.
Part of that, of course, is because of the market’s huge decline. Let’s say you had a $500,000 portfolio, 60% of which was in stocks in October 2007. The bear market took about 40%out of your stock position, leaving you with $180,000 in equities out of a reduced $380,000 total—less than 50% of your holdings. (Even with the recent gains, you would still have just slightly more than 50% in stocks.)
But investors are in no rush to get back to what they thought was so great a couple of years ago. They’re perfectly happy holding less stock.
“A higher percentage [of clients] than I’ve ever seen in my career—10%—didn’t want to reallocate back to their target [equity allocation],” says Cordaro.
So far they’ve resisted Wall Street’s blandishments about a “once-in-a-lifetime” buying opportunity and many financial planners’ arguments that even investors on the brink of retirement should hold 60% or more of their assets in stocks, so they won’t outlive their money.
I have written frequently here that the main problem investors faced in the recent crash and bear market was keeping too much of their assets in stocks. “Buy and hold” investing and asset allocation would have worked just fine had they had their money in the right things. My own research has found that retirees can hold up to 40% of their assets in cash and still be confident their money will last until they turn 90.
Now, the real-world risk tolerance test of 2008-2009 has brought that home to millions and may have permanently altered their behavior—just as many American consumers have stopped buying what they can’t afford.
Cordaro reports that many of his own clients have decided to pay down their debt, even their mortgages, rather than put that money back into stocks.
Also, though I can’t prove this, I think many investors have concluded that the market is stacked against them, if not rigged. Hedge funds with supercomputers, Goldman Sachs Group (NYSE: GSG) with its sophisticated algorithms, “dark pools,” high-speed trading, and the like suggest that individuals don’t have a chance trading, or even investing, against the pros. Better, then, not to be too tied to equities.
Instead, they’ve opted for the higher yields—and presumed greater safety—of bonds. Although they’ve been putting their money into bonds of all maturities, probably too many have been piling into intermediate-term Treasuries and corporate bonds, including high yield bonds. (More than $17 billion of investors’ money has gone into funds holding Treasury Inflation Protected Securities—TIPs—this year. That’s a good thing.)
“It’s pretty basic: people are chasing yield,” says Biderman.
But they may be setting themselves up for disappointment. Bonds handily outperformed stocks during the recent “lost decade” for equities, but research from Vanguard shows that when that happens, they’re likely to underperform in the subsequent ten years.
“We’ve been through a 30-year period of Nirvana for bonds,” says Marilyn Capelli Dimitroff. “Folks lose sight of how big the losses can be with small increases in interest rates.”
Or with the big rate increases that could occur as the economy recovers and the Federal Reserve tries to stave off inflation.
Have you noticed that investors always seem to be fighting the last war? After the dot.com bust, people piled into real estate, which as you recall, never lost value. How’d that one turn out?
The main point, though, is that there are a lot of talking heads on CNBC and other places chattering on about all the cash on the sidelines, some $3.3 trillion sitting in money market funds. (About $880 billion of that is held by individuals, down from over $1 trillion last year.) When individuals feel they are missing the rally, they will start shoveling those funds into stocks. Or maybe they won’t.
“There’s this myth that there’s all this sideline cash ready to move into the market,” says Biderman.
“What sideline cash? People are making less money, they’re taking money out of savings, or they’re putting it into bonds.”
In other words, what if Wall Street threw a party and nobody came?
Howard R. Gold is executive editor of MoneyShow.com. The views expressed in this commentary are his own.