Many investors quit stocks: Is it a buy signal?
— -- Timothy McIntosh, a Tampa financial planner, has always been able to soothe his customers after a rough patch in the stock market. Until now.
"They are just throwing in the towel," McIntosh says.
And it's not just McIntosh's customers. Investors have yanked $249 billion from stock mutual funds since January 2007 — an estimated $60 billion this year alone.
If you can't understand why small investors are getting out of the stock market, you haven't been watching it lately. The average stock mutual fund shed 17.4% in the third quarter, vs. a 13.9% loss for the Standard and Poor's 500-stock index, according to Lipper, which tracks the funds.
But it's not just the losses, which investors used to take in stride. Political turmoil over the budget is taking its toll on some investors. The debt problems in Europe are making other investors nervous. Flash trading by hedge funds and others makes the stock market seem rigged.
"You have better odds in a casino these days," says Raj Nijjer, 33, director of product development at Godaddy.com in Scottsdale, Ariz. "At least with roulette, you know what you're betting on — black or red," Nijjer says. "The market isn't geared to the small investor."
Institutional investors have long thought that peak pessimism is a buy signal, since the small investor is often on the wrong side of the market. But periods like the past 10 years can leave deep scars that last decades longer.
Cutting and running
Mutual fund investors typically follow the money: They add more to their accounts in bull markets, and sell in bear markets. From 2004 through 2006, bull market years, investors poured $473 billion into stock funds, according to the Investment Company Institute, the funds' trade group.
But investors didn't give much love to the bull market that began in March 2009, yanking a net $9 billion in 2009 and another $37 billion in 2010, the ICI says. Instead, investors shoveled more than half a trillion dollars into bond funds.
And once the stock market started showing signs of weakness in May, the money gushed out. From May through September, investors yanked $90 billion from stock funds, the ICI says. The S&P 500 has fallen 16.1% since its 2011 peak on April 29, but poor performance isn't all that's prompting investors to cut and run:
•Alienation. Investors are starting to feel like the game is rigged and that there's no way for them to tag along, even with mutual funds. "I have a degree in finance, and I always figured that if you can't beat them, join them," Nijjer says. "But now, even if you join them, you're still too late to the party."
Nijjer has about half his taxable holdings in money market securities and cash. He's thinking of investing some of his cash in India, where interest rates are higher and the rupee has been appreciating, which boosts his returns. "You take some currency risk, but I have family over there, and I know the economy," he says.
•Age. Frank Lane, 71, retired last year and just can't take it anymore. "When you retire, you have time to think about things, and when you do that, every nickel counts," he says.
Lane, a former doctor who lives in Tampa, cut his stock exposure from about 50% of his portfolio to about 25%.
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