INSIGHT-Mom and pop investors miss out on US stock market gains

Sun Sep 30, 2012 9:59am EDT

* Small investors remain on the sidelines, could miss next rally

* People wary of jumping back into market -experts

* Middle class could be financially unprepared for retirement-economists

* Many US households have less than $100,000 in investable assets-data

* Risk aversion among all age groups on the rise since 2006-report

By Jilian Mincer and Steven C. Johnson

NEW YORK, Sept 30 (Reuters) - U.S. stocks have more than doubled since the financial crisis and are closing in on a five-year high, but many Main Street investors have been absent from the party - especially those with the least saved.

Those who missed much of the rally did so because they reduced equity exposure after the benchmark S&P 500 index plummeted 57 percent between late 2007 and March 2009, according to an analysis by Reuters of mutual fund flows and changes in assets held in retirement accounts. Investors with the smallest savings typically saw the lowest percentage recovery in returns.

And while some have returned to the stock market during the subsequent rally, plenty of small investors remain on the sidelines.

"This is the most uncelebrated bull market in history," said Tony Ferreira, managing director at Cogent Research, which provides research and consulting for large fund managers. "In the old days, people would be jumping on the bandwagon, but nobody's chasing equity performance this time. Many people are still scared to wade back into the water."

If the equity upswing continues, some economists fear it could leave middle class Americans financially unprepared for retirement and widen the growing income disparities between rich and poor, which the U.S. Census Bureau said grew sharply in 2011.

It could also complicate President Barack Obama's chances for re-election, with some voters not having enjoyed much of a wealth effect from the stock market's 3-1/2-year rally.

To be sure, plenty of Americans have seen the balances of their 401(k) retirement accounts bounce back since the financial crisis as inertia kept many from abandoning stocks when the market crashed.

But things are hardly like they were during the bull market in the 1990s, which turned many retail investors into addicts for the latest Internet stock offering.

According to figures from Cerulli Associates that are based on analysis of Federal Reserve data, those with less than $100,000 in investable assets on average had $17,975 at the end of 2011, down 9 percent from $19,732 at the end of 2007.

In contrast, those with $500,000 to $2 million saw a 7 percent uptick to $966,948 from $903,219.

The vast majority of U.S. households - 87 million of the almost 119 million in 2011 - have less than $100,000 in assets, according to the data.

ROLLER COASTER

Investment advisers say stock market plunges in 2000-2002 and 2008-2009, the housing bust, a weak economy and a steady stream of Wall Street scandals have helped sour people on stocks and push them toward the perceived safety of bonds and cash.

Typically when the market doubles after hitting bottom investors return, said Jeffrey Mortimer, director of Investment Strategy at BNY Mellon Wealth Management in Boston.

But not this time. "They're still not back, and they'll unfortunately miss a rally," he said.

Investors didn't dump all their stocks during the crisis, but fewer households now hold equities than a decade ago, according to the Investment Company Institute, a U.S. mutual fund trade organization.

"The vast majority of people have some equity holdings in their 401(k) plans," said Brian Reid, chief economist at the ICI, but fewer are willing to take above-average or substantial risk than they were in 2008, before the market plummeted.

After climbing to 53 percent in 2001, equity ownership in individual stocks, mutual funds, ETFs and variable annuities fell to 48.2 percent in 2008 and 46.4 percent in 2011.

In another sign of how many investors have missed out on the recovery, they have pulled $235 billion out of U.S.-domiciled equity mutual funds, considered a proxy for retail investors, since 2007, data from Thomson Reuters' Lipper service shows.

Of that amount, some $53 billion has come out since last October, the bottom of a two-month selloff sparked by crisis in Europe and the loss of the United States' top credit rating. During that stretch, the benchmark Standard & Poor's has gained 28 percent, the Dow industrials 24 percent.

For the broad investing public, "it's been five solid years of steady outflows from equities and inflows into bonds," said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co, which oversees $1.6 trillion in client assets. "Even 3-1/2 years into this bull market and the gains we've seen since June, it has not turned that psychology around."

KEEPING AHEAD OF INFLATION

Investors who left the market at the end of 2008 or early 2009, paid a high price.

Fidelity Investments found that individuals who had been investing for at least 12 consecutive years in their 401(k) plans but pulled out of equities in late 2008 or early 2009 had an average balance at the end of June 2012 of $167,000, compared with a $212,000 balance for those who didn't.

"The average investor tends to chase returns when things are going well and bolt when things are going poorly," says Drew Kanaly, CEO of Kanaly Trust Co in Houston.

To be fair, even advisers for the very wealthy - people with a few million dollars in assets - have lately been doing "a lot of hand-holding and education" for clients who were scarred by the 2008 crash, said Lori Heinel, head of investment services and chief investment strategist at Oppenheimer Funds.

"But some of these investors may just want to preserve capital. They don't necessarily have to see it grow," she said. "I'm more concerned about the average investor with a 401(K) balance that's less than $100,000."

Indeed, if average investors don't recover some appetite for risk, it could leave more Americans financially under prepared for retirement.

According to the Employee Benefit Research Institute, the median balance was $58,000 for workers 55-64 with a 401(k) retirement plan at the end of 2010. The median for all 401(k) participants that year was $17,686.

About 60 percent of workers and or their spouses had less than $25,000 in savings and investments excluding their homes and pensions, according to EBRI's 2012 Retirement Confidence Survey, which was released in May.

And it's not just baby boomers that are at risk.

A recent Cogent Research report found that risk aversion among all age groups has been on the rise since 2006, including Generation X and Y, who have lived through a number of market collapses.

But while bonds have provided solid returns in recent years, thanks to low inflation and the Federal Reserve efforts to hold down interest rates, advisers say a long-term strategy based on bonds and cash may be riskier than stocks.

Bank accounts and money market funds currently pay next to nothing and a 10-year bond is yielding little more than 1.6 percent.

"If you have a 401(K) or an IRA, you have to be invested in risk assets in order not to outlive your money," said Barry Ritholtz, director of equity research at Fusion IQ. "There's simply no way to get to retirement without some sort of participation in the market. Unless you have $10 million, and maybe even if you do, you have to outpace inflation."

Investors, though, seem to be in no hurry to climb the so-called wall of worry. Now, many fear gridlock in Congress after the election could trigger massive automatic spending cuts and tax increases, bringing on another recession in 2013.

The American Association of Individual Investors reported on Thursday that bullish sentiment - based on whether investors expect stock prices to rise over the next six months - declined in its latest weekly survey to 36.1 percent.

It has now been below the historical average of 39 percent for 25 out of the past 26 weeks, and many of those responding expressed frustration about the political uncertainty.

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Comments (2)
drpalms wrote:
Now the banks OWN your house. When the dollar collapses the government will no longer have the collateral of these houses and the banks will have paid nothing for them. Here is what will come next. If you do not pay your real estate taxes on time you home will become the banks property. One of the first industries to feel the raw power of “emergency measures” was the home industry. During the early stages of inflation, people were applying their increasingly worthless dollars to pay down their mortgages. That was devastating to the lenders. They were being paid back in dollars that were worth only a fraction of the ones they had lent out. The banking crisis had caused the disappearance of savings and investment capital, so they were unable to issue new loans to replace the old. Besides, people were afraid to sell their homes under such chaotic times and, if they did, very few were willing to buy with interest rates that high. Old loans were being paid off, and new loans were not replacing them. The S&Ls, which in the 1980s had been in trouble because home prices were falling, now were going broke because prices were rising.
Congress applied the expected political fix by bailing them out and taking them over. But that did not stop the losses. It merely transferred them to the taxpayers. To put an end to the losses, Congress passed the Housing Fairness and Reform Act (HFRA). It converted all Bancor-denominated contracts to a new unit of value—called the “Fairness Value”— which is determined by the National Average Price Index (NAPI) on Fridays of the preceding week. This has nothing to do with interest rates. It relates to Bancor values. For the purpose of illustration, let us convert Bancors back to dollars. A $50,000 loan on Friday became a $920,000 loan on Monday. Few people could afford the payments. Thousands of angry voters stormed the Capitol building in protest. While the mob shouted obscenities outside, Congress hastily voted to declare a moratorium on all mortgage payments. By the end of the day, no one had to pay anything! The people returned to their homes with satisfaction and gratitude for their wise and generous leaders.
That was only an “emergency” measure to be handled on a more sound basis later on. Many months have now passed, and

Congress has not dared to tamper with the arrangement. The voters would throw them out of office if they tried. Millions of people have been living in their homes at no cost, except for county taxes, which were also beyond the ability of anyone to pay. Following the lead of Congress, the counties also declared a moratorium on their taxes—but not until the federal government agreed to make up their losses under terms of the newly passed Aid to Local Governments Act (ALGA).
Renters are now in the same position, because virtually all rental property has been nationalized, even that which had been totally paid for by their owners. Under HFRA, it is not “fair” for those who are buying their homes to have an advantage over those who are renting. Rent controls made it impossible for apartment owners to keep pace with the rising costs of maintenance and especially their rising taxes. Virtually all rental units have been seized by county governments for back taxes. And since the counties themselves are now dependent on the federal government for most of their revenue, their real estate has been transferred to federal agencies in return for federal aid.
All of this was pleasing to the voters who were gratified that their leaders were “doing something” to solve their problems. It gradually became clear, however, that the federal government was now the owner of all their homes and apartments. The reality is that people are living in them only at the pleasure of the government. They can be relocated to other quarters if that is what the government wants.

Oct 01, 2012 6:47pm EDT  --  Report as abuse
drpalms wrote:
Now the banks OWN your house. When the dollar collapses the government will no longer have the collateral of these houses and the banks will have paid nothing for them. Here is what will come next. If you do not pay your real estate taxes on time you home will become the banks property. One of the first industries to feel the raw power of “emergency measures” was the home industry. During the early stages of inflation, people were applying their increasingly worthless dollars to pay down their mortgages. That was devastating to the lenders. They were being paid back in dollars that were worth only a fraction of the ones they had lent out. The banking crisis had caused the disappearance of savings and investment capital, so they were unable to issue new loans to replace the old. Besides, people were afraid to sell their homes under such chaotic times and, if they did, very few were willing to buy with interest rates that high. Old loans were being paid off, and new loans were not replacing them. The S&Ls, which in the 1980s had been in trouble because home prices were falling, now were going broke because prices were rising.
Congress applied the expected political fix by bailing them out and taking them over. But that did not stop the losses. It merely transferred them to the taxpayers. To put an end to the losses, Congress passed the Housing Fairness and Reform Act (HFRA). It converted all Bancor-denominated contracts to a new unit of value—called the “Fairness Value”— which is determined by the National Average Price Index (NAPI) on Fridays of the preceding week. This has nothing to do with interest rates. It relates to Bancor values. For the purpose of illustration, let us convert Bancors back to dollars. A $50,000 loan on Friday became a $920,000 loan on Monday. Few people could afford the payments. Thousands of angry voters stormed the Capitol building in protest. While the mob shouted obscenities outside, Congress hastily voted to declare a moratorium on all mortgage payments. By the end of the day, no one had to pay anything! The people returned to their homes with satisfaction and gratitude for their wise and generous leaders.
That was only an “emergency” measure to be handled on a more sound basis later on. Many months have now passed, and

Congress has not dared to tamper with the arrangement. The voters would throw them out of office if they tried. Millions of people have been living in their homes at no cost, except for county taxes, which were also beyond the ability of anyone to pay. Following the lead of Congress, the counties also declared a moratorium on their taxes—but not until the federal government agreed to make up their losses under terms of the newly passed Aid to Local Governments Act (ALGA).
Renters are now in the same position, because virtually all rental property has been nationalized, even that which had been totally paid for by their owners. Under HFRA, it is not “fair” for those who are buying their homes to have an advantage over those who are renting. Rent controls made it impossible for apartment owners to keep pace with the rising costs of maintenance and especially their rising taxes. Virtually all rental units have been seized by county governments for back taxes. And since the counties themselves are now dependent on the federal government for most of their revenue, their real estate has been transferred to federal agencies in return for federal aid.
All of this was pleasing to the voters who were gratified that their leaders were “doing something” to solve their problems. It gradually became clear, however, that the federal government was now the owner of all their homes and apartments. The reality is that people are living in them only at the pleasure of the government. They can be relocated to other quarters if that is what the government wants.

Oct 01, 2012 6:47pm EDT  --  Report as abuse
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