Retirement investors are back in love with stocks

Retirement investors are pouring money into stocks. Is that a sign of a market top?

Stocks made up about two-thirds of new contributions going into employee 401k accounts in March, The Wall Street Journal reports. The newspaper cited data from Aon Hewitt, which tracks 401k data at large companies. Regular investors are finally coming around to stocks after watching their retirement portfolios evaporate in the financial crisis. They sat on the market sidelines for years, too nervous to jump back in.

What changed their minds? Watching stocks soar 32 percent last year. The jobs picture is improving and the economy seems to be turning around.

The news was met with some cynicism last week. "Is there any way this ends well?" asked Los Angeles Times reporter Walter Hamilton on Twitter. "Here we go again -- I see trouble!" added another Twitter user.

Of course, retail investors are known for being a little off on their timing. They fled stocks when the market hit bottom during the financial crisis, right when professional investors were piling in. Those who left the market missed the boat on years of outsized market gains.

Here's the total annual return for the Standard & Poor's 500 index over the last five years, according to YCharts:

2013: 32.4 percent
2012: 16 percent
2011: 2.1 percent
2010: 15.1 percent
2009: 26.5 percent

This year has been a different story. The S&P 500 has risen only 1.9 percent in 2014. Compare that to the 11 percent growth seen at the same point last year.

Another reason regular investors may be favoring stocks is because there aren't many other places showing gains right now. Yields on long-term bonds are down, and it doesn't look like bond returns are coming up anytime soon. The world's largest bond fund, the Pimco Total Return Fund, has seen 12 straight months of outflows. That continued in April, when investors withdrew $3.1 billion, CNBC reports.

There's no telling how the market will fare over the rest of the year, of course. For every expert predicting more gains for stocks, you'll find another warning of a correction. For instance, Dennis Gartman of the Gartman Letter investing newsletter said in early April that he "got scared" and moved his stock exposure from 100 percent to nearly zero. Less than three weeks later, he said he was back to stocks and was "pleasantly long" on the market. One week after that, he said he was back on the sidelines.

"I do not like switching back and forth. It's not fun," he told CNBC. But the lesson was clear. If even the professionals can't figure it out, how can regular investors know any better?

  • Kim Peterson

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