Stocks: Losing Money and Getting Out, Young Investors First to Bail
'Neurofinance' is new 25-cent word for 'panic.'
Aug. 9, 2011 -- Investors are fleeing the stock market's scalding volatility for the cool, calm comfort of cash, analysts say. Contrary to likely expectations, it's the youngest investors -- the ones who supposedly have the greatest tolerance for risk -- who are fleeing fastest.
Monday's market drop, the sixth biggest in the history of the Dow Jones Industrial Average, vaporized $2.3 trillion in investor wealth. The VIX index, a measure of market fear, soared to levels not seen since 2009.
Jacob Barr, 28, a technology consultant, cashed out all his investments Friday, after watching the stock market take a 513-point dive the day before. "It seemed like a good time to sell," Barr told the Tennessean newspaper.
As for getting back in at some point, he told the newspaper he would, but not until, "I get my feet back on the pavement. Then I'll be able to buy at a better price."
Adam Bruno, 28, of River Vale, N.J., said he lost more than $1,600 last week, just when he thought his portfolio was finally starting to turn around. "Monday was OK," he told the Newark Star-Ledger. "Tuesday was a slow decline. And Thursday, obviously, it fell off a cliff."
The experience, he said, left him worried he was witnessing "a repeat of 2008."
Fears rooted in the financial collapse of 2008, experts say, are prompting not just youngsters but investors of all ages and levels of experience to bolt stocks for cash.
Adherents of so-called neurofinance, a branch of psychology that studies why people make irrational financial decisions, cite the current flight to cash as a vivid example of how past trauma can recalibrate an investor's tolerance for risk. People who bear the mental scars of the 2008 market panic, they say, are more likely to pull the rip cord and sell reflexively than to relax, put their feet up and reason through the pros and cons of staying in the market.
Roy Niederhoffer, who has a degree in computational neuroscience from Harvard and who runs money management firm R.G. Niederhoffer Capital Management, said, "Our view, coming out of our computer models, is that there is a very strong cognitive bias affecting investors right now, a tendency to remember recent information very vividly compared to older events."
In other words: They're terrified.
"A lot of action seems to be emotion-driven more than market-driven," said William Finnegan, senior managing director of U.S. retail marketing for MFS, a global money management firm.
A recent survey by MFS showed that investors of all ages are moving into cash. MFS said the trend, which it first detected last fall, "appears to be a deliberate and fundamental change in investing," with investors being "driven by fear … to protect their assets."
The Great Recession of 2008, Finnegan said, turns out to have had "a profound and longer-lasting impact on investors' confidence than expected."
Most surprising, the MFS survey found that Generation Y (investors between the ages of 18 and 30) have abandoned stocks for cash sooner and more aggressively than their older peers. So fundamental is their change in attitude, Finnegan said, that such investors "don't even call themselves investors anymore. They're savers."
Generation Y is now 30 percent invested in cash, compared with 26 percent for investors overall, according to the MFS survey.
As for possibly missing the inevitable market rally, "They don't care," Finnegan said. "Their world view has changed. These are 'Recession Babies,' the same way that an older generation were 'Depression Babies.'"
Denise Shull, founder of Trader Psyches and a consultant to investors on neuroscience strategies, said investors young or old will get out of cash and back into stocks when the "market has clearly bottomed, traded very low, on high volume, traded back up and then tested that low and rejected it. I wouldn't expect this until 2012 at the earliest."
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