Many individual investors are throwing in the towel on the U.S. stock market. They’re packing their bags and going home. This departure from stocks is not a short-term hiatus, mind you. A sizable number are vowing to stay away from stocks for the rest of their lives.
For some investors, the stock market has a permanent black cloud over it. They say it’s just not worth suffering through more years of volatile price action and gut-wrenching plunges just to end up with less money than when they started. The number of people who feel this way will surprise you.
CNN Money recently reported on the results of a new Prudential Securities survey that polled more than 1,000 investors between the ages of 35 and 70. They found that 58 percent of those surveyed have lost faith in the U.S. stock market. Only 25 percent plan to invest more in stocks this year, 31 percent said they were going to wait at least another year before investing more, and 44 percent said they plan to stay out of the game permanently.
According to Liz Ann Sonders, chief investment strategist with Charles Schwab & Co. in New York, “There’s a view that the market is rigged.” It would appear that way to 6 o’clock news watchers, given several high-profile insider-trading scandals and relentless finger pointing at Wall Street for America’s economic ills.
Truth be told, we’ve seen this all before. Over the past 80 years, there have been three long and gut-wrenching downturns in the stock market followed by high unemployment, stale economic growth and investor dissatisfaction. These periods occurred in the 1930s, 1970s, and 2000s. Toward the end of each bad patch in U.S. economic history, a high number of individual investors give up on the stock market forever.
The crash of 1929 came slowly at first. Then, following a Federal Reserve tightening and Congressional tax increase on imports, the market collapsed. By 1932, stocks had fallen 82 percent. As a result, banks collapsed, sending the economy into a tailspin and throwing the country into period of despair. The public left the stock market in droves, claiming never to return. Public ownership in stock fell from 10 percent in 1930 to less than 4 percent in 1940.
The turnaround came in the early 1950s as a new generation of investors emerged. The stock market moved higher and that caught the attention of even more people. These were new investors, not the ones hurt in the crash.
The boom in stock prices lasted until the late 1960s before a serious downturn hit. The decade of the ‘70s was difficult. There was political turmoil, rising unemployment, rising interest rate, higher inflation, and oil embargos. There was a “crisis in confidence” as President Carter put it in 1979. The country was in a malaise.
The following chart of investor equity holdings from the Federal Reserve bank (pink line) and rolling 5-year equity returns (black line) is from my first book, Serious Money, Straight Talk About Investing for Retirement [self-published, 1999]. It illustrates that the general public was again out-of-sync with long cycles in the secular market. Prices peaked in 1968 and bottomed in 1974. Investors, on the other hand, continued to increase buying into the early 1970s. Selling began about 1971 and continued for the rest of the decade even though the stock market bottomed in 1974, long before Carter’s malaise speech.
Had investors held pat on their roughly 24 percent household allocation to stocks over the entire period from the 1950s through the 1990s, and not tried to time the market over this period, they would have gained an extra 1 percent annualized in return, from 12.2 percent to 13.2 percent.
The extra 1 percent return from rebalancing to a fixed amount in stocks during the 1950s-1990 is very close to the excess return an investor would have earned from 2000 to 2011, had they also held their allocation in stocks rather than trying to time the markets. See this article titledThe Death of Buy and Hold has Been Greatly Exaggerated.
The current bearishness of U.S. stocks is a rerun of the 1930s and 1970s. Investors are down on stocks because stocks have been down. Investors will start feeling more optimistic only after stocks make gains for several more years.
This attitude has mixed blessings. It’s bad because investors who vowed to stay out of the market will miss out on needed growth to reach their retirement goal. It’s good because this attitude tends to signal the worst has passed for the markets, even if the economy slows a bit, and that means today’s investors will likely reap over-sized rewards for enduring the malaise.
Postingan
