Small Investors Sit Out Wall St. Rebound

Washington Post: Stock Market Rally Driven by Larger, Institutional Clients; Individual Investors Remain Cautious

(Washingtonpost.com)  This story was written by Tomoeh Murakami Tse.

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Wall Street may be cheering the rally in the U.S. stock market, but many individual investors watched the Dow Jones industrial average soar past the 10,000 mark Wednesday on the sidelines.

Still shell-shocked from the ravaging of their retirement accounts during the financial crisis, mom-and-pop investors remained cautious as the Dow soared 53 percent from its March 9 low to Wednesday's closing price of 10,015.86.

The likely drivers of the rally are instead institutional investors such as large pension funds and hedge funds, market analysts said. And in interviews over the past two weeks, fund managers and financial advisers said most small investors have only recently begun to talk about getting more aggressive with their beaten-down portfolios.

"For the first six months of the year, people just had their heads down. I don't know how many people told me they haven't looked at their statements," said Dan Lash, a financial planner in Vienna.

It was only last month, when the Dow had already recovered more than 40 percent of its losses, that Charlotte and Larry Vass of La Plata, Md., decided they were ready to consider taking a less conservative stance. The Vasses had been mostly invested in stocks two years ago but began pulling out last fall as markets were pummeled after the collapse of the Wall Street investment bank Lehman Brothers. Over the past year, the Vasses also moved deeper into bonds, said Charlotte, who is in her late 50s.

"Back then, we were in shock," she added.

While the couple plan to keep their portfolio more balanced, Charlotte and her husband, a dentist, have asked their financial planner to be a little more aggressive. They have begun adding money -- slowly -- to stock index funds, she said.

"If your 401(k) turns into a 201(k), you can't get it back in a couple of years," said Charlotte, adding that retirement, which the couple thought might come in a few years, has been pushed further down the road.

Wall St. In Neutral after Hitting 10,000

Investors in mutual funds, which are among the most common ways for individuals to participate in the stock market, pulled more than $205 billion out of stock funds between September 2008, when equities plunged, to the end of March, when they began their rally, according to data from the Investment Company Institute. During the same period, small investors sought the safety of cash, pouring $357 billion into money-market funds.

In contrast, only $56 billion returned to stock funds between April and the end of August, the most recent date for which data are available. Money-market-fund levels remained high.

"This market rise certainly is not being driven by mutual fund investors," said Brian Reid, the ICI's chief economist. "Mutual fund flows are not causing this run-up, and I would think that probably carries over for retail investors in general."

In fact, there's evidence that small investors in the past few months have once again been moving money out of U.S. stocks. On a weekly basis, small investors took out $2 billion to $4 billion more than they put into funds focusing primarily on domestic stocks from July to September, Reid said.

ICI data show that small investors have been pushing into bonds this year, taking advantage of falling interest rates and rising prices. During the first eight months of the year, $220 billion flowed into bond funds.

"Last year is going to change people's risk tolerance for a long time to come," Lash said. "They're not going to have a diversified stock-only portfolio. They realize that everything went down the same last year. There was nowhere to hide except Treasurys and cash."

According to Christine Parker, president of Parker Financial in La Plata, many small investors have adopted a less-than-go-go outlook.

"There's the pessimism of 'Is this just short-lived? Will this last?' " said Parker, many of whose clients are female executives in their 40s and 50s and retirees. "People are worried about consumer spending and the ending of the stimulus." In particular, she said, investors are wondering what will happen to the economy after the government's $8,000 tax credit for first-time home buyers expires at the end of November.

As stocks go higher, warnings from investment strategists that the market has increased too far, too fast have grown louder.

"We've had this wonderful run-up. What you have to be concerned about is that valuations have become stretched," said Brett Hammond, chief investment strategist at TIAA-CREF. "Markets tend to anticipate economic news, but they don't necessarily predict it. The economic news is better than it was, but it's certainly not rosy."

On Wednesday, as the closing bell approached on the New York Stock Exchange, Charlotte Vass said she had no regrets about not returning to the market sooner.

"We're cautiously optimistic, so it makes sense to move back in more slowly," she said. "The market is a fickle lady."

[rhs648]

voxpopulus - You posted the perfect description of investor psychology. People repeat the same error over and over again. They buy too late after the market rises and sell when the market is down. This is why so many people lose instead of making money. Two of my relatives did that while I have been busy buying mutual funds for almost a year. My portfolio is ahead of where it was at the beginning of the recession. For forty years, I have been buying when stocks are low and sell when they are high. It really works.

[payasyougo]

Lets see....

Government gives over $1T to financial firms "too big to fail" and loans them money at 0-.5%. Those firms in turn invest the money and make billions while their actions prop up the stock market so federal and state pensions might have a chance at being properly funded.

Meanwhile, mutual fund inflows are near historic lows.

So with the government propping up the stock market, why would I step in?

Unless the whole plan is to get prop it up long enough that the herd mentality starts trickling back in.

The housing situation is not better and in fact the commercial sector is in trouble.

Cars and houses are moving when my grandchildren are providing the incentives through tax breaks.

It's been a year now and not a single piece of legislation out of Barney Frank's team to prevent another bubble/collapse.

I'm a small investor. Doesn't mean I'm blind or stupid.

[voxpopulus]

You gotta love some small investors: "Honey, stocks are getting more expensive, maybe we should buy some." Maybe you should have listened to Buffett and bought some in March, then you would not have missed one of the great economic opportunities of the past twenty years. Many people will sit it out even longer, jump in when it's even more expensive, and then complain when they lose money.