Many individual investors were tiptoeing back into stocks in the spring. Now, they're running for cover again.
Karen and Roger Potyk, a comfortably retired couple in San Antonio, Texas, had clung to some stock mutual funds despite their anxiety after the financial crisis of 2008. But the renewed market volatility after the "flash crash" of May 6 proved too much to bear.
"We just didn't want to put up with it anymore," says Karen Potyk. She and her husband sold the last of their stock holdings on May 20, moving the money to bonds, certificates of deposit and bondlike annuities.
Small investors' faith in stocks, which surged in the 1990s, has collapsed since the technology-stock debacle and the Enron and WorldCom scandals of 2000-2002. The 2007-2009 financial crisis only made things worse. Now, the pullback among ordinary investors means they are a declining force in a market that is increasingly dominated by professionals.
Some were tantalized by equities during the 70% rally that began in March 2009 and ran through April. But mutual-fund data and other clues suggest that that brief infatuation has ended.
In 2002, investors withdrew more money from mutual funds that invest in U.S. stocks than they put in. Then from 2007 through 2009 they withdrew money for three consecutive years. That marked the first three-year period of withdrawals since 1979-1981, according to the Investment Company Institute, a mutual-fund trade group. This year, U.S.-stock funds saw inflows in January, March and April, but net withdrawals resumed in May.
Investors talk of a growing disillusionment with big institutions, including corporations, government, banks and political parties -- as well as fears about the nation's heavy debt. Some people's confidence in stocks was seriously shaken by the volatility that returned in May. They worry that the May 6 flash crash, when the Dow Jones Industrial Average ($INDU) fell 700 points in eight minutes before rebounding, is a sign that ordinary people are increasingly at the mercy of anonymous companies that trade with powerful computers.
Individual investors were important market pillars in the 1990s, but their flight from stocks is changing the market dynamic. By adding money to mutual funds, individuals helped push stocks higher in the 1990s and to a lesser extent from 2003 through 2006. Now they are moving money out again on balance, making them a drag on the market.
Ordinary investors are returning to the cautious mentality they developed during the 1970s. That was the last extended period of stock weakness, after which it took many people a decade or more to get comfortable with stocks again.
"I feel like the tail of the dog that is being wagged by institutional investors who are taking a lot of risk, playing a lot of games and just have these computerized orders that affect me a lot," says Simeon Thibeaux, a semi-retired businessman from Alexandria, La.
Rebounding after a two-month slump, the Dow jumped 511 points, or 5%, last week, its biggest weekly gain in almost a year, although it remains down 9% since topping out on April 26.
"We have gone through two of the worst bear markets since the Great Depression, and it has given investors a better sense of the risks and dangers of investing" in stocks, Reid says, referring to the bear markets of 2000-2002 and 2007-2009.
The gradual dissipation of investor confidence can be seen in mutual-fund investing patterns.
After getting hurt in the 2000 tech-stock crunch, individuals came back to U.S.-stock funds in 2003, as stocks were entering a new bull market, ICI data show. But the buying proved tepid and turned to net selling in the latter part of 2006, even before the bull market ended in 2007. Despite occasional periods of inflows to U.S.-stock funds, the selling trend has continued since then. Individuals removed a net $7 billion from stock funds in the seven days ending May 12 and $13 billion two weeks later, eclipsing the deposits from earlier in the year.
Shaken by volatility
Recent volatility has certainly shaken the Potyks' confidence. Roger Potyk, a 68-year-old pharmacist, spent 25 years as an Army officer and 11 years with Pfizer (PFE, news, msgs) before retiring. His wife, 63, is a retired real-estate broker.The Potyks stuck with their stocks through the tech wreck, the Sept. 11 attacks and Enron. They were willing to take risks to get stock-market returns. By 2006, he and his financial adviser say, the Potyks' portfolio was 50% stocks and 50% bonds and other fixed-income investments.
The big blow to their confidence was the 2008 collapse of brokerage-firm Lehman Brothers, in which they lost $75,000 on a Lehman bond. Although it was a bond that hurt them, the Potyks' faith in all potentially risky investments was shattered.
"In the military, you learn that you want people you can respect, trust, who have integrity," Roger Potyk says. "Over the last five years or so, I find that our financial institutions have no shred of the character I describe."
The last straw was the May market volatility, accompanied by widespread fears about European government debt. On May 20, the Potyks asked their financial adviser to sell the last of their stock mutual funds.
Now that their portfolio consists entirely of fixed-income investments, "I won't make 8% on my money. I will make 4% or 5%, but the money will be there," Roger Potyk says.
Continued: A lower risk tolerance among younger Americans
