This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
The Journal cited investor disillusionment with financial institutions and flat-out fear as the main drivers of the trend that has contributed to a major shift in allocations. From 2007-2009, investors withdrew more money from stock funds than they put in. It was the first three-year period of withdrawals since 1979-1981, according to the Investment Company Institute.
After adhering to blind faith in stocks in the 1990's (remember your cousin, the day-trader?), investors have just lived through two crashes in one decade: the 2000-2002 technology collapse and the 2007-2009 financial crisis. As a result, instead of those juicy 8-10 percent returns that seduced investors and advisors in the 1990's, everyone is now dealing with the reality of negative returns. The S&P 500 has FALLEN at an annualized rate of 3 percent over the past decade, including dividends.
It's understandable that in the current environment, some investors are unwilling to assume the risk of stocks and are shifting to other assets like government bonds, CDs and fixed annuities. Should you dump your holdings in return for safety? The answer depends on your situation-here are two cases to consider:
- If you can't sleep at night, then you probably need to avoid risky assets. But if you choose to do so, please don't jump back in AFTER the market starts to rise again-that would upend your decision. Also know that when you trade upside potential for security, it could mean that you will need to save more money or work longer.
- If you have a long time horizon and a diversified portfolio, you may be able to weather these turbulent times-a portfolio of 60% stocks and 40% bonds that was rebalanced over the past decade was UP over 3% per year over the last 10 years. While 3% may seem paltry, it's important to remember that surviving the past decade with these returns may out you in a good position when the market recovers in the future.
Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.