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Stop fleeing stocks

By Sheyna Steiner · Bankrate.com
Friday, July 6, 2012
Posted: 11 am ET

Individuals are no longer investing in stocks, according to an analysis of fund flow data in the Smartmoney.com article, "Should retail investors return to stocks?"

From the story:

The European financial crisis and the poor employment outlook prompted global investors to pull $41.6 billion from equity funds in the second quarter. If those outflows seem mild given the volatility of the past few months, it’s because the majority of retail investors may have already dumped their stocks, says Cameron Brandt, a global markets analyst for EPFR Global, a research firm.

While individual investors run from the stock market into bond funds and money markets, institutional investors are moving into stocks, the story reports.

Individual investors say they're still bearish on the stock market according to a recent investor sentiment survey by the American Association of Individual Investors. Last week's survey revealed that 44 percent of investors thought stocks would fall over the next six months. The survey conducted on July 5 showed that number moving down to 33 percent, still more than the historical average of 30 percent.

Clearly there's no shortage of worries on which a concerned investor could hang her hat. Between the sluggish U.S. economy in general, the looming fiscal cliff and the European debt crisis, there is a lot to freak out about. Those worries could become reality, or they could pass.

The problem is that investors typically feel the worst right before the market turns around. A story published this week on NJ.com, the website for 12 of New Jersey's largest papers, "Investor survey reveals pessimism still running high," examined the patterns of market dips and investor sentiment.

From the story:

The (Standard & Poor's 500 index's) price-earnings ratio slid to a two-year low of 11.9 times annual profit on Oct. 3 before the level of bearishness by individual investors climbed above its historical average. The multiple has since rebounded 16 percent and is trading at 13.8 times profits in the past year.

The reading reached an all-time high of 70.3 percent on March 5, 2009, four days before the S&P 500 bottomed at a 12- year low of 676.53. The benchmark stocks index has since surged 102 percent as corporate profits exceeded analysts’ estimates and the Federal Reserve carried out two rounds of bond purchases known as quantitative easing.

Investor anxiety has yet to reach a fever pitch, but it could increase as summer ends and the election season heats up. Right behind the November election, the budget battle in Congress will recommence. As we saw last year, that could have a devastating impact on the economy and investors.

That doesn't mean now is the time to sell stocks.

For investors with a long time to remain in the market, maintaining an allocation to stocks is the best way to reach your financial goals. Portfolios don't have to be, and some would say shouldn't be, all stocks or all bonds. While bonds provide stability and some predictability, the extra returns from stocks can buoy your portfolio over time.

The mistake made by many individuals is to get out of the stock market with a plan to get in when they feel more secure. By the time they feel really positive about stocks, the bull market has run its course, and they've missed all the gains.

If you're considering getting back into equities, read the Bankrate feature, "6 ways to get back into the stock market."

Have you changed your investing plan recently, or do you stay invested in stocks?

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2 Comments
Sheyna Steiner
July 06, 2012 at 1:27 pm

No doubt, the deck is stacked against individuals.

To my thinking, that's more of a case for investing in index funds and eschewing market timing. I am personally unaware of any better alternatives, are there better choices out there for individuals -- besides simply spending less, saving more and squirreling money away in FDIC-insured accounts?

Larry Mietus
July 06, 2012 at 12:20 pm

While I appreciate Ms Steiners well reasoned evaluation of what wise stock market strategy was some years ago, but I do not think that market she speaks of exists today. As an individual investor for the past 20 years, I have that the Market no longer serves its purpose to determine and reward and support companies or products. The market now serves Big investors who use it as a money Casino to p

Contrarian analysis blunts declines in failing companies, rewards those who stumble. 70% of trades are made by machines sucking "dumb money" from individual investors out of the market. Huge sums of money in unregulated Hedge Funds move the market and with programmed trading crash it. Derivatives, an insurance issued by a group lacking the assets to repay the principle they insure allow risk to snowball putting all investors at risk. Market crashes we have seen due to this activity cannot be