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Monday, August 23, 2010

Forget it... Stocks are Worthless! Honey, We're Moving Everything to Bonds

More headlines are discussing the flight out of stocks and into bonds. The NYTs featured this article over the weekend:
As of mid-afternoon Sunday, it was the "most popular - business day" article emailed on the NYTs' Web site:

The article opens with this commentary:
  • Renewed economic uncertainty is testing Americans' generation-long love affair with the stock market.
  • Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
  • If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.
  • The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans' sense of financial security.
  • It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people's attitudes toward money for decades.
  • ....
  • Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.
  • ....
  • On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.
  • According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group.
The article includes a graphic detailing the shift:
But, is this really a "flight to safety" as labeled above? Could the crowd be right? What would common sense tell us?

We'll come back with more later this week.

Happy investing,

Jeffrey Walkenhorst

Disclosure: n/a.
© 2010 Jeffrey Walkenhorst
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  1. Jeff,

    I recently pulled out of the market, as I wanted to lock in some gains that I made. I think the future isn't all bad and I like the values in the market right now, but I am wary of psychology. I think American investors (myself included) are often driven by psychology more than by results.

    That said, there is a lot of negative psychology out there right now. A lot of people worried that we are headed for a double dip and that the economy is teetering on the brink right now...you have posted some of these headlines. I think at some point this is a "self fulfilling prophecy" and that if everyone gets scared, they will leave the market which causes it to go down which makes more people scared etc.

    I will continue to watch the market and I would love to get into some of the higher yielding blue chips (JNJ, INTC, XOM) while the are and become attractively valued.

    Good luck! Hope this helps you to understand "one of the small guys".

  2. Hello Danny,
    Thank you for your comment. No question, psychology rules the roost, so to speak. You can perform research until you're blue in the face and sometimes it simply doesn't matter if "the tape" moves against you. Still, fundamentals ultimately drive share prices - those companies with strong balance sheets and positive fundamentals are more likely to outperform the broader market, even with negative headwinds. Growth, in particular, tends to keep investors out of trouble, as John Neff likes to say. The Market is especially favoring growth companies at present - see performance of AMZN, BIDU, CRM, MELI, and PCLN to name several high fliers.... Dividends are also quite important, especially given uncertain capital returns. I agree with you that there's a lot of negative psychology that may remain a drag for some time to come, largely thanks to the necessary de-leveraging process occurring in the real estate market. We need to pick our spots. JNJ, while I don't own the company, is a fine place to be for those seeking high quality, stable business with a decent dividend.

  3. Danny,

    BTW, re: JNJ, this is well worth a read - risk factors from FORTUNE:
    Fortune Aug 18, 2010
    Why J&J's headache won't go away
    Once praised for setting the standard in crisis management, the health care giant is reeling from a stream of drug recalls. Fortune investigates what went wrong and why it isn't getting better.

    While Berkshire Hathaway has been buying more JNJ, the concerns highlighted by Fortune represent ongoing challenges/risks for the company to sort out.



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