Glenn Salka of Fair Lawn, N.J., who near the 2009 market bottom said he was putting 100% of his free cash into "safe stuff," is still doing that. Why? "Fear. Risk. Take your pick," he says.
Lok Patel, Dubuque, Iowa: "Too many people invest on emotions rather than just investing in stable companies that consistently post profits and pay dividends."
Wendy Hunt, Cincinnati: "We are taking risks again. We've moved out of the really conservative securities to a large extent and are back with more blue chips than ever."
By Adam Shell, USA TODAY
NEW YORK — Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks.
He liquidated 75% of his stock funds. He hasn't put that cash back in the market. And doesn't plan to.
That emotion-driven decision, made with his wife, Linda, nixed any chance of profiting from the 63% rally that began shortly after selling out in a state of anxiety.
But Blank has no regrets: "I have no desire to attempt to make back what I lost."
Since stocks stopped plunging in March, professional money managers and traders on Wall Street have piled back into the stock market, benefiting from the sharpest rebound in history. But, like Blank, many Main Street investors have yet to regain their stomach for the risky, uncertain and highly volatile world of stocks — leading Andre Weisbrod, CEO of Staar Financial Advisors, to note in a recent report that many buy-and-hold investors have unwittingly switched to a "buy-and-fold" strategy.
Individual investors who once embraced risk-taking have adopted a more defensive investing posture, preferring capital preservation over appreciation. Many are trimming the percentage of stocks they own and boosting holdings of safer investments, such as certificates of deposit and money market funds.
Harry Nieman, 73, a retiree from Pittsburgh, who lost 25% of his $2 million portfolio in the 2008-09 downdraft, just nibbles on individual stocks now, while stashing most of his cash in CDs and high-yielding online bank accounts. David Moran, 62, kept nearly 100% of his money in stocks during and after the 2000 tech-stock bust but sold a lot of shares before the March 2009 low. "I could never be 100% invested in stocks again," the Wayland, Mass., technical writer says.
Similarly, Glenn Salka, a 57-year-old insurance professional from Fair Lawn, N.J., who near the 2009 market bottom told USA TODAY he was putting 100% of his free cash into "safe stuff," is still employing the same conservative strategy. Asked why, Salka said, "Fear. Risk. Take your pick."
Market turbulence caused by signs that China is clamping down on credit to slow its economy, bank bashing by the White House, concerns over debt problems in some European countries and the recent pullback has investors on edge. A two-day rally this week left stocks down 1.1% in 2010.
Following the money trail highlights the shift toward defense. Since the start of 2008, when the worst financial crisis since the Great Depression began shredding paper wealth into confetti, stock funds have suffered outflows totaling $232 billion, Investment Company Institute statistics show. In contrast, fixed-income bond mutual funds have enjoyed inflows of $431 billion.
The love affair with bonds could end badly, says Brian Belski, chief investment strategist at Oppenheimer. In the 2000s, bonds outperformed stocks by a record 7.7 percentage points, on average, annually. The only other times bonds outpaced stocks for a full decade were the 1930s and 1970s. In both cases, stocks rebounded in the following decades, topping bonds by an average 10 percentage points a year.
"Due to the shock and awe of the past 10 years, most people went to the safest assets they could find," says Belski, who thinks now is a good time to move out of bonds into stocks.
Some analysts insist the growing reliance on lower-risk strategies is more than a temporary reaction to the financial tumult that has shaken investor confidence. They believe it's a lasting, long-term change. They warn that individual investors won't return to their old pattern of funneling the bulk of free cash flow into stocks.
The last time investors were hit by major back-to-back stock bear markets was 1968-70 and 1973-74. Back then, they lowered their stock holdings as a percentage of assets from a peak of 35% to 15%. They did not come back to the market in a big way until the 1982 bull market, Bank of America Merrill Lynch research shows.
Less demand for stocks, analysts say, could steal some of the cash ammunition the stock market needs to move higher.
David Rosenberg, chief investment strategist at Gluskin Sheff, cites an aging population and two severe bear markets in the past decade as reasons individual investors are shifting their money into more stable investments.
"It makes perfect sense," he says. "The median Baby Boomer is 52 and is naturally shifting toward capital preservation."
Adds Bob Cohen, a financial planner at Financial Strategies & Wealth Management, "Investors still want to make money, but they're more aware of risks."
After the bear
Interviews with close to two dozen individual investors offer a more balanced portrait of how they have adapted their investment strategies after the worst meltdown since the 1930s.
- The first is the buy-and-folder, or investors who sold near the bottom and have either stayed out of the stock market or gotten back in gingerly.
- The second is the old-fashioned buy-and-hold investor, those who stayed the course. They rode the market all the way down and still made automatic monthly investments to their 401(k)s, enabling them to participate in the rebound.
- The third is the so-called double-down investor. These more aggressive types had the courage to buy stocks near the market low. They were rewarded handsomely as stocks shot up off of depressed levels.
Snapshots of each type:
•Buy-and-folders. There are many investors, including those nearing retirement, who just want out of the stock market to reduce anxiety, protect assets they still have and embark on a more risk-averse path. While this group won't necessarily stay out of the market forever, they are unlikely to make huge bets on stocks.
Martin Blank fits the profile. Asked why he won't ever again bet big on stocks, he said, "I have a basic distrust of the system."
Nieman, the 73-year-old Pittsburgh native and ex-banker, admits that he's much more "timid" when it comes to stocks. A big reason relates to his age. "I'm more cautious, more vulnerable," he says. "I am more concerned about preserving my capital. Everyone once believed that investing in stocks can make you a millionaire. But the past few years, we have seen that you can lose everything."
•Buy-and-holders. While staying fully invested is painful as losses mount when stocks plunge, it pays off when the inevitable rebound unfolds.
Lok Patel, 67, an engineer at John Deere, didn't sell any stock during the market's 57% plunge. He's glad he didn't. "The market came back," he says. Even though Patel, from Dubuque, Iowa, says he was shaken by the scary market volatility, he stuck to basic investment principles, such as spreading his money around many different types of assets, investing only in good companies and funneling a set amount of money each month into stocks, a strategy called dollar-cost averaging.
"Too many people invest on emotions rather than just investing in stable companies that consistently post profits and pay dividends," Patel says, adding that stocks remain one of the few places investors can get a decent return these days.
Donna Bischoff, 59, a self-described "slow and steady" investor from New Orleans, has regained all but 0.2% of losses she suffered in the downturn — thanks to building a diversified portfolio, avoiding speculative stocks and sticking with her buy-and-hold strategy in bad times.
"I got burned in the '90s owning single stocks, and that taught me a lesson about diversification," Bischoff says, adding that she is gradually reducing her stock exposure to better reflect her lower risk tolerance as she nears 60.
•Double-downers. There is an old saying on Wall Street that the best time to buy stocks is when there's blood in the streets.
That's what Paul Davis, 48, did last spring when the Dow looked like it would tumble to zero.
In April 2009, three months after losing his job — and just a month after the market low when fear and panic remained high — Davis invested 90% of a $100,000 401(k) rollover in stocks. It paid off. The $100,000 is now worth $126,000.
Why did Davis take the risk? He had success in the past buying when fear was palpable.
Michael Hartnett, chief global equity strategist at BofA Merrill Lynch, backed the strategy in a recent report. "Long-term investors should always buy 'humiliation' and sell 'hubris,' " he wrote. Stocks are now the "humiliated" asset class.
Margaret Schaefer, 70, a retired educator from Dearborn, Mich., did just that. Near the March 2009 low, she bought a basket of the most hated stocks: financials. She also bought General Motors when the automaker's future was in question. She tripled her money on both.
"CDs and money markets were paying under 2%," says Schaefer. "I was willing to take the risk."
And while the nearly 7% tumble off the recent high was a reminder that stocks can still go down in a hurry, an analysis of how stocks perform after a recession suggests that another 20% bear market decline is unlikely. Going back to 1928, the S&P 500 fell 10% or more six to 18 months after a recession in 10 of 13 cases (77% odds). But the index suffered only a 20%-plus drop five times (38%), says Ned Davis Research.
A correction, or a drop of 10%, is what Bart Ruff, 45, of Lederach, Pa., says is his buy signal.
Says Ruff, "I missed the opportunity to buy at the bottom last year, and I don't need to be overly aggressive right now. But I'll start increasing my stock holdings at around a 10% correction." Ruff had 70% of his money in stocks pre-slump, vs. 56% now.
If another brutal bear market can be ruled out, that's good news for Wendy Hunt, a 37-year-old married mom from Cincinnati. Hunt who turned ultra-defensive in March, says she is back in the stock market.
"We are taking risks again," she says. "We've moved out of the really conservative securities to a large extent and are back with more blue chips than ever."
Carmine Grigoli, chief investment strategist at Mizuho Securities USA, says that is a bullish sign. He expects more individual investors to come back to stocks and resume their normal investment patterns once it becomes clear the improvement in the economy and financial markets is here to stay.
"The more distant the memory of the financial crisis, the less frightening it becomes," he says.
http://www.usatoday.com/money/markets/2010-02-03-realinvestors03_CV_N.htm
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