Stock market losses take a personal toll on investors

NEW YORK -- Even Monday's monster rally on top of two weeks of steady gains can't dull the pain of a brutal fact: Behind the battered stock market's most gruesome statistic — $9.3 trillion in vanished wealth — are the life-altering stories of investors who have lost lots of money.

For the second time this decade, the U.S. stock market has suffered a historic 50% swoon, testing the staying power of even the most committed long-term investors. Shaken by a severe global recession and the worst financial crisis since the Great Depression, many investors are rethinking the way they manage their money and are ratcheting down risk.

The human faces behind the shrinking account balances are portraits in pain and dashed dreams, and offer an intimate glimpse into an uncertain financial future:

• Margaret Schaefer, 71, a retired teacher from Dearborn, Mich., recently took a part-time teaching job to avoid dipping into her retirement account, which has lost a third of its value.

• Robert Muse, 40, an aggressive investor from Reading, Pa., whose stocks have plunged nearly 70%, says he won't feel financially secure until he has $50,000 tucked away in government-insured certificates of deposit.

• Dan Cobb, a 61-year-old retiree, says he feels "too guilty" to buy a new motorcycle because his wife is still working and his cracked nest egg is down half-a-million bucks.

• Frank Baker, 59, a computer analyst who has seen his holdings dwindle to $500,000 from $1.2 million, worries that he may have to start looking for a job in two years when his current contract expires, rather than retire as planned.

• Grace Cooling, 42, a Houston-based engineer who still believes in stocks for the long run — despite losing "hundreds of thousands of dollars" in her 401(k) — sums up the angst felt by many Americans whose financial futures are riding on stocks: "My biggest fear is that my investments may not recover."

The Dow Jones industrial average vaulted 497 points Monday on the Treasury's plan to rid the U.S. financial system of toxic assets, and now is up more than 1,200 points in two weeks. But since its October 2007 peak, the most popular barometer of the U.S. market still is down nearly 6,400 points, a bruising that has prompted investors to reassess the widely accepted view that owning stocks is the best path to long-term wealth.

"The equity culture is coming under attack," Robert Buckland, chief global equity strategist at Citi Global Wealth Management, wrote in his March outlook.

Indeed, despite a recent 19% rally off of the March 9 low, investment pros still wonder if the gains will last and if investors' once-insatiable appetite for stocks will ever return. They fear a new investing landscape marked by a more defensive approach and less risk-taking will emerge.

Some stock strategists, such as Jason Trennert of Strategas Research Partners, warn that retail investors may not return to the stock market in a meaningful way for a generation.

Of course, there are investors, such as David Brno, a 41-year-old financial analyst from Arlington, Mass., who believe the stock market will eventually regain its wealth-building form and who say now is the time to buy, not sell stocks. "You get a great buying opportunity like this once in a generation," Brno says.

Keeping faith in the stock model

There are also investors like 40-year-old Jeffrey Banks, who think "time is on their side." Or Vikas Arora, 44, who has not lost faith in the power of capitalism and still believes buying stocks on a regular basis, even in tough times — a strategy known as dollar-cost averaging — will prove profitable over the long haul.

In fact, 12 of the 20 individual investors interviewed by USA TODAY for this story said they had not lost faith in the stock market, bailed out of stocks, or gone totally defensive with their stock portfolios.

They are confident the market will bounce back — eventually. Many investors are reluctant to get out now, fearing they will sell at or near the bottom. They don't want to miss out when the turn comes. "I want to be ready in case it goes up," Schaefer says.

That line of reasoning makes sense, says Bob Dickey, an analyst at RBC Wealth Management. In a recent report titled "Don't Sell at the Bottom," he advises investors to "resist the temptation to do anything hasty at this relatively late stage of the bear cycle."

Still, signs of a stock market exodus are evident in the mutual fund world. Retail fund investors, long considered staunch supporters of a buy-and-hold investment strategy, have been fleeing the stock market in droves. In the week ended March 11, the most recent data available, investors yanked a net $22.1 billion out of stock funds, according to estimates from the Investment Company Institute, an industry trade group. That was the sixth straight week of outflows, putting stock funds on track for their ninth month of outflows in the past 10 months.

Indeed, spooked by the massive wealth destruction on Wall Street and the uncertain outlook for the crippled U.S. economy, many investors are now more interested in preserving what money they have than they are in making a killing in the stock market.

After watching the value of his stock portfolio dive between $750,000 and $1 million, Harry Nieman, a 72-year-old ex-banker, for example, now spends a lot of time searching for CDs that pay the highest yields.

Nieman is not alone in his hunt for safe, yet low-yielding, CDs. There was $1.36 trillion parked in CDs as of March 2, up more than 11% from a year ago, according to Federal Reserve data. The average yield on a one-year CD was 1.37% as of last week, says Bankrate.com. While that pales in comparison with the 10% long-term average annual return of stocks, many investors are willing to give up some potential upside just as long as they know they will get back their initial investment principal.

A move into cash at the right time

Similarly, more than a year ago, Carl Emerling, 58, a pharmaceutical worker from Lakeland, Fla., bailed out of stocks completely and put 100% of his cash into a money market mutual fund, a decision he initially "second-guessed" but now happily equates with "winning the lottery." The move allowed him to avoid massive losses.

Deposits to money market mutual funds have also soared. There is now $3.86 trillion on the sidelines sitting in money market funds, just below the record $3.92 trillion hit the second week of January, according to Crane Data, which tracks money market flows. At the end of 2008, balances and contributions in stable value and money market funds were up 70% from a year earlier, a study by Mercer found.

The cash buildup is a clear sign of investors' desperate search for safety, says Peter Crane, president of Crane Data. "The current mantra is that in a more dangerous world you have to hold more cash," Crane says.

That heightened risk aversion is a big reason why the amount of 401(k) assets held in stocks near the end of 2008 was at an all-time low of 53.8%, according to Hewitt Associates. That is down from 68.1% a year ago and far below the record of 74.2% in 2000. The steep drop in stock assets is also due to plunging stock prices.

"It probably is the buying opportunity of a lifetime," says Bob Cording, 76, a retiree from Kingsport, Tenn. "We have saved cash to reinvest, but I'm too chicken at this time."

Investor uncertainty remains high. There is still no clear sense of how the financial crisis will play out, whether stocks have finally hit bottom, or if President Obama's economic team, the Federal Reserve and the U.S. Treasury Department have the right prescription to fix what ails the economy and banking sector.

"I would not say I am convinced that we have turned the corner," admits retired lawyer J. Sean Keenan, 66, of Canton, Ohio, who says he has not lost faith in stocks despite being burned by the crash of financial stocks such as insurer American International Group and Citigroup. "I'm sitting and watching and hoping for the best. I've lost a lot of money. But at least I didn't have investments with (Bernie) Madoff," who pleaded guilty to a $65 billion Ponzi scheme that left many investors with nothing.

Adds Baker: "I guess I am starting to feel that my 30 years of work will go down the toilet."

Despite all the fears surrounding the potential for stocks to fall again, make a lower low and scare the pants off already frightened investors, not all individuals have given up on stocks as the best long-term road to building wealth.

And not all investors have given up on the Warren Buffet style of investing, which involves summoning up the courage in scary times to buy stocks at what some perceive as fire-sale prices in the hopes of netting a big profit years down the road. "You have to have faith that the system will work its way out of this," Keenan says. "The market will go up again, and when it does go up, that is when you make money."