By Chris Taylor
March 13 By all accounts, investors have
enjoyed a terrific start to 2012. Stocks had their best January
in 15 years, and the Dow Jones Industrial Average raced to
multi-year highs, topping 13,000 at the end of February.
So what do mom-and-pop investors think of the equity rally?
They're not buying it. Literally.
Take MeLinda McCall. As chief operating officer of a
software startup in Plano, Texas, the 38-year-old mom of two
makes enough money to put a little aside every month. But
instead of betting it on the stock market, it's been going
straight into her account at Bank of America.
"I don't want it to go anywhere, and I feel if I invest it,
it might vaporize," she says. "At this point I'm just going to
sit on the cash until I feel better about the market. Maybe
that's an ignorant approach, but at least I know it isn't going
to go negative."
McCall isn't alone in preferring the security of hard cash
to the uncertainties of the stock market. In January, investors
tucked $123 billion into plain-vanilla savings and checking
accounts, according to TrimTabs Investment Research, a
Sausalito, California firm which analyzes fund flows for
institutional clients. Those were the biggest inflows since last
August, when the ratings agency Standard & Poor's spooked
investors by downgrading U.S. credit.
"Most investor money is just going under the mattress these
days," says David Santschi, executive vice president of
TrimTabs. "And what isn't going under the mattress, is going
That jibes with data from fund-tracking firm Lipper, a
Thomson Reuters company, which found that investors
pulled $3.6 billion from their stock funds through the end of
February. That's on top of the $93 billion they yanked out last
year. Taxable bond funds, meanwhile, continue to charge ahead,
with $43 billion in inflows year-to-date.
What's most surprising about those numbers is that after
such a strong start to the year for equities, you would expect
regular investors to be diving back in, desperate for the solid
returns that have eluded them for so long. But instead, 2012 is
proving to be a reliable sequel to 2011, when investors eschewed
stocks and sunk almost $1 trillion into savings and checking
TRUST ISSUES, SELF-DEFEATING BEHAVIOR
So what exactly is going on? It might be time for American
investors to put themselves on the psychologist's couch. After
the heavy portfolio damage stemming from the financial crisis of
2008 and 2009, it appears as though many accountholders have
developed trust issues that aren't going away any time soon.
"The biggest reason is that investors just don't trust the
stability of the system," says Santschi. "The markets have been
so volatile that it makes investors nervous. If we're in such a
durable recovery, and if the financial system is so stable, then
why are central banks intervening more and more, and in bigger
and bigger ways?"
Those deep-seated trust issues help to explain recent fund
flows. But to behavioral economists, the continued reticence
toward stocks isn't that surprising. The financial meltdown is
still relatively recent, and the emotional overhang of those
panicked moments still hasn't gone away.
"Investors who experienced substantial losses during the
financial crisis have a tendency to anchor on that event," says
Victor Ricciardi, a finance professor at Baltimore's Goucher
College. "Many individuals are traumatized...and only want to
hold money in cash-related accounts they perceive as safe and
Moreover, by the time investors finally feel comfortable
diving back in, the market may have already reached a top. Human
emotions like greed and fear often goad us into terrible
investment decision-making. "Buying high and selling low is a
definite result of that," says Ricciardi, noting that investors
who stayed away from stocks have missed out on gains of more
than 100 percent during the past three years.
Equity markets could have a tough time keeping up those
solid returns if individual investors don't come flooding back,
say experts like David Rosenberg, chief strategist for Gluskin
Sheff, a Toronto money management firm. "The general public has
become gun shy because of all the bursting bubbles, and then you
have the overlay of demographics, since baby boomers are in the
part of their life cycle where they're worried about capital
preservation. So there's a lot of reticence about putting money
For those who are sitting on their cash, there's also a cost
to staying moored in such safe harbors. At today's
below-inflation yields, opting for cash is virtually the
equivalent of burying it in your backyard. If your retirement
plan factors in annual gains of five percent, say, sticking to
cash just isn't going to get you to the finish line.
"Cash will give you the illusion of safety, but at what
cost?" asks Matthew Tuttle, a financial planner and chief
executive officer of Tuttle Wealth Management in Stamford,
Connecticut. "There are very few people who can afford to earn
nothing on their money and enjoy the kind of lifestyle they
After all, banks' money-market accounts are averaging a
microscopic 0.46 percent, and interest checking isn't much
better at 0.5 percent, according to financial information site
Bankrate.com. Even if the Federal Reserve succeeds at keeping
inflation to its target of a modest two percent, your cash
holdings still won't be keeping pace. Jaded investors might
reply: At least that money will still be there when you need it.
"I haven't made a move into the stock market for a couple of
years now," says McCall. "I'm sure I will get back into stocks
eventually. I know I'm not getting any return from my bank
accounts, and I know I can't retire on that. But right now I
still don't think the timing is right for stocks."
By the time she thinks the timing is right, the pros might
be calling a market top.