Last Updated Jun 7, 2011 12:45 PM EDT
Ninety-two percent of Americans recently said they believe in God. Stocks? Not so much. Nearly six in 10 investors polled in a new study by Prudential Financial said they have "lost faith altogether" in the stock market, and nearly half of respondents said they are not likely to ever put more money into stocks.
In CDs We Trust
That sort of extreme dislike and distrust would have made perfect sense in any survey floated from say mid-2008 through mid-2009. With the stock market in a steep decline and Chicken Little looking like a sage, human nature and behavioral finance tell us that a collective desire to steer clear of the very thing that was causing us so much hurt and anxiety was to be expected. But the Prudential survey was conducted this past winter at a juncture when the Standard & Poor's 500 index had rebounded nearly 100 percent from its March 2009 low. Still, a very large slice of Americans are vowing to stay on the sidelines. Forever.
And these are folks who are, in fact, investors. Prudential self-selected individuals from households with at least $50,000 in investable assets, not including housing, and nearly half had investments of at least $250,000. So this isn't some random sample that includes people who weren't investors even before the crisis hit. That 58 percent of investors surveyed say they are distrustful of the markets, and 44 percent have no inclination to put more money at all into the stock market -- now or ever -- suggests the problem goes beyond some transitory recency bias.
Moreover, the surveyed investors are very aware that their shunning of stocks creates a dangerous trade-off. In the wake of the crisis/recession, the percentage of respondents who describe their investing approach as aggressive dropped from 47 percent to 37 percent, while those branding their approach as conservative rose from 33 percent to 40 percent. Yet at the same time, 73 percent of all respondents acknowledge that their current, more conservative strategy means they will not earn enough to make up their losses from the past few years. So this isn't something you can chalk up to a lack of financial literacy or education. That 7 in 10 acknowledge the potential long-term cost of their decision, suggests they are well-aware of risk/reward. It's just that they've had it with risk. Not surprisingly, 60 percent said sticking with investments that offer rock-solid guarantees trumps any potential for higher growth.
Taking Stock of A Rigged System
It's not really the stock market that's the problem. After the past 11 years, you'd have to be an idiot to not be pretty well schooled in the inherent volatility of the stock market. What seems to be different this time around is a growing sense that it's the system that's put us at an unfair disadvantage. Seven in 10 survey respondents said they believe it's hard to find a trustworthy financial institution, and 62 percent said they couldn't think of any firm in the financial industry they would trust. (Props to Prudential Financial for publishing that self-damning factoid.)
In a Rasmussen poll conducted last month, 64 percent agreed that government hasn't been tough enough on Wall Street, and just 12 percent of us are willing to let Wall Street off the hook for the financial crisis by chalking it up to "uncontrollable economic circumstances." After watching the continued efforts to defang the Dodd-Frank financial reform bill, the ongoing battle to eviscerate the Consumer Financial Protection Bureau, and the wholly ineffective exercise that was the Financial Crisis Inquiry Commission, we're clearly feeling the system is rigged against Main Street. In the Rasmussen poll, 51 percent of Americans say they believe the government is more focused on helping Wall Street generate profits than "making sure the U.S. financial system works well for all Americans." Just 22 percent say the government is more concerned with making the system work for all. So by more than a 2-to-1 margin, we're convinced the system isn't looking out for us. When you don't trust the system, it makes sense that you'd be reluctant to buy its main product: stocks.
How to Survive on a Reduced-Stock Diet
There's just one problem with individual investors saying no mas. Stocks, in fact, offer the best shot at inflation-beating gains over the long-term. And inflation is one of the most dangerous, and overlooked risks, to financial security. If inflation tracks at just its historic norm, the purchasing power of $1 today will be cut in half in 20 years. If your portfolio isn't keeping up (and hopefully surpassing) that pace of growth, then your standard of living will decline.
I'd also suggest you rethink, or at least rein in, any expectation that you will be just fine with an extremely conservative approach because you plan to keep working in retirement to bring in income. In a new Gallup poll, 80 percent of workers today say they expect to keep working in retirement. But the Employee Benefit Research Institute reports that while 74 percent of workers expect to keep working for pay in retirement, just 23 percent of current retirees are in fact pulling down any salary. No matter what your intentions are, you need to have a Plan B if working longer doesn't pan out exactly as you're hoping.
Bottom line is that if you're determined to swear off stocks -- or limit your intake -- then you've got to face up to two incontrovertible truths: you either need to start saving more today to offset the lower long-term returns offered by a more conservative investment approach, or plan on living on less in retirement. Simply saying no to stocks isn't a solution. It's a decision with repercussions. Are you planning for those repercussions?
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