Have individual investors lost faith in the stock market? • Some recent headlines have suggested that, pointing to factors such as the mass exodus of investors from stock mutual funds. • From September 2008 through July 2010 — a period that included the financial crisis, the confession of Bernie Madoff and the mysterious May 6 flash crash — investors have yanked nearly $175 billion out of U.S.-based stock funds and poured $496 billion into safer-seeming bond funds, according to the Investment Company Institute. • A story in USA Today this month said Wall Street fears a "lost generation of investors similar to what occurred after steep stock declines in the 1930s during the Great Depression and early 1970s." • To get the pulse of the average investor, the Chronicle talked to Charles Rotblut, vice president at the American Association of Individual Investors, a nonprofit focused on investor education and information. Rotblut also edits the AAII Journal. Here are excerpts from that interview.
Has the average investor abandoned stocks?
Some investors feel the odds are stacked against them. One member described it as an evil hand that is pushing them aside. When you see things like the flash crash, it further erodes confidence. If you look at (former Hewlett-Packard CEO) Mark Hurd, it's hard to understand how someone can lie on their expense report and get a job two weeks later.
Others are taking it in stride. They know some fundamental problems need to be fixed, but they realize the stock market is the best vehicle for building wealth long term.
The big problem for investors is that everywhere they look, there is no good place to turn. … There doesn't seem to be a good investment right now. What you are seeing is inertia. Investors are not doing anything.
How about alternative investments?
We do see some investors looking at gold and currencies, which have become easier to buy through exchange-traded funds. I don't see that becoming a primary part of investors' portfolios.
Do investors feel like Congress and regulators have fixed the problems that caused the financial crisis?
This is a problem. Investors need a clear explanation of how the financial regulation bill is going to help them. They haven't gotten one.
Is it going to help them?
It is going to hold financial firms to a higher standard. But this doesn't relieve investors from doing their own homework, reading prospectuses and annual reports. No regulation is going to take that responsibility away from the individual investor.
And if you're not willing to do that?
Obviously, you should talk to an adviser, but the best defense against fraud is knowing exactly what you are investing in and the potential risks. If you own a fund, pay attention to the fund itself. Investors have to manage their money as if it was their business. You have to read through all the fine print. I know it's boring, but it's necessary.
And if you're not willing to monitor an adviser or fund, what should you do? Put your money in CDs?
I hate to say it, but yes.
Individual investors are often seen as a contrary indicator. They tend to be overly bullish (optimistic) at market peaks and overly bearish (pessimistic) at troughs. How are they today?
Since 1987, we have been surveying members each week. We ask: What do you think the market will do over the next six months: go up, down or no change?
Last week, 43.9 percent of investors were bullish and 31.6 percent were bearish. That was a lot more bullish than previous weeks, but not extreme. Our long-term average is 39 percent bullish and 30 percent bearish.
When the spread between bulls and bears gets extreme, that is often near tops and bottoms.
On March 5, 2009, for example, 70.3 percent were bearish and only 18.9 percent were bullish. Four days later, the market bottomed out. But this indicator is not always reliable. There is no one magic sign. You have to look at a lot of indicators.
What is your own view on the stock market?
I put myself in the neutral camp. I think we're in a period of sustained slow economic growth. It's going to be difficult for corporations to maintain a high rate of earnings growth. It will continue to be challenging for stocks and also difficult for the bond markets going forward.
How would one invest for that scenario?
Consider less economically sensitive stocks, such as consumer staples and food. Ordinarily we would put health care into that as well. The problem is that for the major pharmaceuticals, we have patents expiring. For health insurers and hospitals, we have health care reform. Those present unique challenges to the industry.
I would also look at growth opportunities in case the economic data turn out to be better than anybody expected.
Do you think we have created a lost generation of stock investors?
We are seeing temporary anxiety, but the drop in stocks wasn't severe enough to create a lost generation like we saw after the Great Depression.