Maybe Atrios is right that the reason that small investors are fleeing the stock market is simple lack of money. The fact that 401(k) loans and hardship withdrawals are at an all-time high backs that theory. But it’s also worth looking at market volatility. Nobody likes to take a roller-coaster ride with their life savings:
MikeJ
Probably too much to hope for that they’ve wised up and seen that the deck is stacked against them.
Alwhite
The last 10 years have a lost decade for my 401k, despite picking above average funds with low management fees my account has not grown. I can only imagine how much worse it must be for people stuck in company run funds – so many of them are filled with the dogs of the market, higher than average fees & lower than average returns.
I should be on the down-hill slope to retirement in 5 years but there is no way since the company I worked for for 20 years gutted the pension fund & left me with $30k. So, when you X, Y and Millennials wonder why us useless old farts will not go away & open jobs for you you can thank the master of the universe that gave us these conditions
Villago Delenda Est
The game is rigged. Why play it? The only way to win it is not to play.
Derelict
I remember the guy who ran the fund for the company I worked for back in 1999 extolling us all on how we should put the bulk of our monies into the dot-com and technology stocks.
Roller coaster? it’s not even that good!
D-Chance.
That, 20% real unemployment, a stimulus that didn’t, an administration that doesn’t know what the Hell it’s doing, a market that’s flat-lined… but those dollar bills make for good mattress filler. And that’s about the most useful place for them for the next 2-6 years, minimum.
EDIT – just looking at my ‘investments’… IRA has under 10% in stocks right now, non-IRA has ZERO % in stocks. Maybe that will change in 3-4 months, but I don’t see it. No one is hiring, no one is saying anything positive about the next decade, no one seems to have a fucking clue as to what to do. Best to sit on your pile while you still have a pile to sit on.
Cat Lady
The only thing left worth stealing is Social Security, and since the masters of the universe have neither been perp-walked, jumped nor gone Galt, investing in cat food companies would be a good bet.
MattF
Financial advisors talk about ‘risk tolerance’ without explaining that this is a euphemism for ‘how you would feel about losing all your money.’ I’ve never bought the notion that you should put most of your savings in stocks– somewheres between 25 and 35 percent is reasonable for diversification. More than that, you’re setting yourself up for the nearest pickpocket.
Michael
As I watch the value of what little investment that we have left get chiseled away year after year and wonder why these “professional” and well paid fund managers can’t seem to even match (much less beat) the indices, I’ve resolved to never again invest in the casino should I have any money again. When I consider that the poor decisionmaking and the excessively compensated finance side is seeing consolidation and concentration of its power at the expense of production, nothing good can come of it.
Then again, I’ve gone about 70% Marxist lately, so there you go. Pretty amazing switch for a two time Bush voter.
Starfish
@MattF: Risk tolerance doesn’t have to be about losing all your money.
I think “When is the right time to reallocate?” is a better question. Some people have stop-losses on everything so if the market oscillates wildly, they will be out if things go down 5%. Other people may be comfortable with losing more. However, the real problem is at the other end of things. People do not know when to take the money and run when they are up, and they do not know how much risk they are taking by letting some position in something that was very volatile make up a lot of their portfolio.
mclaren
Theme song? Highway To Hell by AC/DC.
1…2… 1..2..3..4… Hit it, Bernanke!
Svensker
Speaking as a very small investor, it also has a great deal to do with the fact that I don’t trust ANYONE in business or finance right now. In my mind, every word they say is a lie, designed to fleece me while lining their own pockets. Can’t believe I’m alone on that.
mai naem
These financial pricks even managed to get their hands to real estate, one of the last non-financial management pieces left for small investors. And nothing gets my blood pressure rising than seeing all these same pricks go on teevee about increasing the ss age or decreasing benefits. It isn’t enough that these mofos stole from the average worker with the increased payroll tax deal from ’86 and then the tax cuts for the super wealthy. Complete transfer of wealth from the middle class and poor to the superwealthy. And then Alan Simpson has the huevos to talk about decreasing benefits. Go frick yourself. Alan Simpson whose version of hard manual labor is probably walking into a restaurant to as a lobbyist to eat with some fat cat is going to tell some construction worker with 35 yrs of hard labor “too bad sucka, you gotta put in another five years.”
New Yorker
Lack of money is why I’m not in it right now. My savings was significantly drained by 2 years in grad school full-time and 1 year of un/underemployment, so there was no way I could risk losing more of it in such a volatile stock market. I had my savings in treasuries for a while, and I just recently switched it over to investment-graded corporate bonds.
Nancy
You’d think this would end forever the talk about privatizing Social Security…at least you’d think that, huh?
Linda Featheringill
Why are the small investers opting out? Well it could be:
a) They are not complete idiots.
b) They just lost a large chunk of their security in the stock market.
c) Who knows what tomorrow will bring? Doesn’t look good from here with high unemployment and low consumer confidence.
d) Some are using their spare change to pay down their debts.
e) Some of them did not realize they were gambling with their retirement fund. They thought they were investing. When they realized they were wrong, it was a rude shock and they changed their behavior.
f) All of the above.
TJ
@Linda Featheringill:
g. The small guys are beginning to realize they are the designated patsies when the market goes down.
Glen Tomkins
Look at them teeth on that saw
The market sawtooths up and down just before it goes into a large and long-lasting swing in either of those two directions. Two guesses which way it’s getting ready to go long-term, and “up” doesn’t count.
Forty2
Of course it’s a rigged casino. Anyone still in stocks is an idiot. You can be assured that the house wins no matter the direction of the market. The average retail investor/saver cannot go short aside from a few overpriced and poorly-valued ETFs and mutuals.
I moved all my retirement savings from a mix of equities and bonds to Treasury and GNMA bonds in September 2007, just a bit before the market top. A little early, but I did not lose anything. I’m not bragging or claiming to call the market; things just felt wrong and crazy and my spidey sense said “get out.” I am still out, and plan to be for quite a while. Yes I missed the engineered “rally” from S&P 666 because I simply could not believe that economic conditions warranted anything but a complete crash. I still think that that is the case now. Stocks are horribly overpriced and bonds are becoming the next bubble. YOU CANNOT WIN.
BobS
My wife’s good friend had to dip into her 401(k) because she lost her job. That’s one person I know about. Given the tendency of people to be less than candid about the details of their personal financial situation, particularly when it involves hardship, I’d be real surprised if that didn’t explain most of the withdrawals.
Walker
By the time any useful investing information reaches a retail investor, it has already been factored into the price.
The stock market is like Poker. If you do not know who is the patsy at the table, then the patsy is you.
Nick
401ks are the primary reason corporate America owns us and our government has to pay homage to them.
We can’t rock the corporate world in a way we have to, lest the stock market crash and everyone lose their retirement savings. The middle class, or whats left of it, got themselves involved in the stock market in hopes to make an easy buck so they can retire early (or comfortably). Now they’re just bitches for the aristocracy.
FDR didn’t have that problem.
GeorgeSalt
Friday evening I caught NBC Nightly News. They ran the story about people tapping into their 401k accounts to cover their expenses. Now, I agree that this is generally a bad financial move. But then, the NBC analyst said:
Now that statement made me take pause. My first question to myself was “who are these financial advisors?” Would they be the same advisors who make tons in commissions by “managing” those funds? The same people who are just itching to “manage” our Social Security savings — for a modest fee, oh course? I got the impression that these advisors were more interested in saving their management fees rather than helping people prepare for retirement.
The markets have proven incapable of providing a secure retirement for the people of this country, just as they have proven incapable of delivering high quality healthcare at a reasonable cost.
cmorenc
It’s only been two to three years ago when an astounding number of people bit into the notion that they had a decent shot at making a sizable amount of money by “day trading” in the stock market. Because they could nominally think of it as clever
“gambling”“investing”, they were able to think of themselves as doing something sharply different than say, taking up trying to make it on the World Poker Tour, and to the extent they might be grudgingly be willing to accept analogies to gambling, they believed the most apt analogy was to single-deck blackjack, where careful application of study, skill, and prompt attention could actually tip the medium and long-term odds in favor of the player rather than the “house”. They really thought individuals could beat out professional investment houses, because the vast majority of reputable fund managers refused (or weren’t allowed to) use that kind of very short-term approach. They didn’t realize that some big players (like Goldman-Sachs) actually had privileged milliseconds-lookahead access to the buy bids and sell offers of other traders, and were positioned to make computerized buys and sells based on that split-second advance inside knowledge, to generate guaranteed huge profits over time.The only people I know who actually made some money day-trading were small fish who dabbled in it short-term and were content to make a little money from it before they realized they’d in effect merely been lucky playing a game that might as well have been a slot machine, and retired from the game a few small thousands to the good. I know others who lost huge sums after they made some tempting early modest gains day-trading, hooked on the notion they were clever enough to beat the system longer-term.
nanute
@GeorgeSalt:Meghan McCardle?
Calvin Jones and the 13th Apostle
@GeorgeSalt: What did you expect? You do know that NBC also owns CNBC, right? And CNBC is market pumper supreme. All the CNBC hosts are GOPer/Galtian nutjobs.
DickSpudCouchPotatoDetective
Or maybe you could just ask somebody who took their money out of the stock market.
Like me.
I would be glad to tell you why. It’s because I don’t trust the cocksuckers and thieves who run the stock markets and pimp the markets. It’s that simple. They are running a casino which is rigged in their interests. I don’t choose to play at this time.
That simple.
DickSpudCouchPotatoDetective
I really don’t have time for the moderation-hell bullshit today.
Reposting:
Or maybe you could just ask somebody who took their money out of the stock market.
Like me.
I would be glad to tell you why. It’s because I don’t trust the c0cksuckers and thieves who run the stock markets and pimp the markets. It’s that simple. They are running a casino which is rigged in their interests. I don’t choose to play at this time.
That simple.
DickSpudCouchPotatoDetective
I really don’t have time for the moderation-hell bullsh t today.
Reposting again:
Or maybe you could just ask somebody who took their money out of the stock market.
Like me.
I would be glad to tell you why. It’s because I don’t trust the c0cks_ ckers and thieves who run the stock markets and pimp the markets. It’s that simple. They are running a casino which is rigged in their interests. I don’t choose to play at this time.
That simple.
DickSpudCouchPotatoDetective
WTF
DickSpudCouchPotatoDetective
Or maybe you could just ask somebody who took their money out of the stock market.
Like me.
I would be glad to tell you why. It’s because I don’t trust the c0x_ uckers and thieves who run the stock markets and pimp the markets. It’s that simple. They are running a casino which is rigged in their interests. I don’t choose to play at this time.
That simple.
DickSpudCouchPotatoDetective
Or maybe you could just ask somebody who took their money out of the stock market.
Like me.
I would be glad to tell you why. It’s because I don’t trust people who run the stock markets and pi mp the markets. It’s that simple. They are running a gambling hall which is rigged in their interests. I don’t choose to play at this time.
That simple.
And your mod filter is a fucking joke. You really ought to do something about it.
gypsy howell
We are perfect example. Put what’s left of my chunk of SEP-IRA into cash back in 2005 or so — just couldn’t stand the roller-coaster ride, and it just never seemed to go anywhere anyway, even in the best years. But of course, earning 1.5% interest on it now feels foolish.
So we had a financial advisor in two weeks ago. He laid out a conservative plan for “low risk” scenario that would theoretically be enough to retire on if I can keep myself employed til I’m 69. (A-hahahahhaha!) But all we keep thinking is, we might need that chunk of money much sooner if in the next year or so I’m one of the Lucky Duckies who finds themselves without an income and at 56 years old, too old to change careers.
So, stupid or not, we’re keeping it in cash.
coloradoblue
The commenters who talked about no longer trusting advisors are absolutely correct. Another reason I’m 100% out of the market is HST, high speed trading. When ‘quants’ are running the markets, we small time investors have not chance of playing in a fair game. It’s ALL rigged. Get out now if you haven’t already.
Brachiator
@Cat Lady:
But they don’t want to steal it, they want to privatize it. This way, when all your pension disappears, conservative pundits can blame you for being an imprudent investor.
@BobS:
The news stories note that people are drawing on the 401(k) fund for living expenses. A chunk of this has to be related to layoffs.
maya
There is one other consideration about why the small guy may be pulling out of the market. I’m almost, but not quite ashamed to admit it but my portfolio,(non-ira) did expand over the past 10 years. This is the last of the three year 0% capital gains rate for the little guy, like me, in the 10-15% bracket. I started dumping two years ago and will get rid of the last of those cg’s this year, though the present gains are not as impressive as they were two years ago and one year ago. However, what I have in IRA will probably stay put. It has shrunk, but is not needed now.
jrg
Yep. I’ve been following best-practices for years: dollar-cost averaging, re-balancing, etc. I’m starting to get the feeling that one of two things is going to happen:
1) My investments over the next 20 years will do poorly. If this is the case, Financial experts will come up with new “best practices”, and “conservatives” will use the new goalposts as an excuse to label me imprudent, and will attempt to punish me by taking away Social Security.
2) My investments over the next 20 years will do well. If this is the case, every broke-ass red-state hillbilly will claim that anyone with > 10k in retirement savings is a liberal elitist, and they’ll raise the taxes on withdrawal to 90% so they can fund more wars and bridges in Alaska.
Either way, I’ll probably be eating cat food.
Zuzu's Petals
Probably a small factor relative to the larger drawdowns, but as so many of us boomers approach retirement age we move to less volatile investments. That’s a standard approach.
I’ve always been about conserving principal, so when even my mutual funds started losing more than I was putting in a few years back, I moved to all cash and bonds or bond funds. Would rather have low or even zero growth than a loss.
As I say, this tendency likely accounts for a small percentage of the recent decline in stock investments, but is one to consider in the long-term curve. I’d imagine the withdrawals by seniors with larger disposable incomes are not going to be immediately offset by the entrance of younger investors into the market.
Lurker
For my retirement accounts, I keep my age in bonds/TIPS and the rest in low-cost, total-market index funds from Vanguard. I have 30+ years before retirement, so I’m not worried about short-term volatility.
The only thing keeping me from investing more at this time is income uncertainty. I do not have steady employment, so I’m putting more into short-term savings than long-term investing right now.
Felanius Kootea (formerly Salt and freshly ground black people)
My (403b) retirement account contributions are now 30% stocks and 70% bonds/money market/fixed income accounts. I figure I have at least 33 more years of work ahead of me and try not to worry about the fact that I’ve been investing in my retirement fund for 10 years (initially 95% exposed to stocks because I was in my twenties and listened to the idiots who told me to put almost everything in stocks) and it is now at the level it was in 2004. Yay me.
chopper
either way you’re boned. my TSP has been all-bonds for some time now, but bonds aren’t even beating inflation half the time. better than watching 20% of it disappear at a time tho, but not great.
the fact that i also have a pension helps me sleep at night, but not well.
mclaren
@Linda Featheringill:
Explain the difference between “gambling” and “investing,” please.
Inquiring minds want to know.
Comrade Mary
@DickSpudCouchPotatoDetective: Psst! The six letter word starting with “c” that designates a place commonly found in Las Vegas and Atlantic City trips the moderation filter.
I’m in Canada, where we’re still a little less volatile, but I still pulled ALL my accumulated investments (not that much, sadly) from mutual funds to money market, where they ain’t growing but they ain’t shrinking, either. I’m still buying about $100 of mutual funds a month and am using them as a tiny real-time index of market performance, but I’m prepared to move these to money market if things really get hairy.
What kills me is that apart from the tax free saving accounts we have here (which let you add a whole $5000/year at maybe 3% interest), I may be facing years where I’m doing the equivalent of putting cash under my mattress. Hell, yeah, I’m working into my official retirement years.
Ken Pidcock
@Svensker: You’re not alone on that, but it is depressing how many have yet to realize that the relationship between financial services and people who have to work for their income is strictly parasitic. (I realize that, if you’re in financial services, you’re proud of that. I would be, too.)
Daulnay
One unlikely but very good reason is that the investors are being completely rational:
1) The world financial situation is more like the Great Depression than an ordinary recession. We’re very close to a deflationary spiral, which is a key difference between the two.
2) Given that the world is facing something like the Great Depression, moving from stocks to bonds is the best investment move you can make.
Here’s why:
During normal times, central banks like the Fed influence the economy by raising or lowering the money supply in order to affect interest rates. The key interest rates are the ‘real interest rates’, which are measured as the nominal (everyday ordinary) rates (r) minus the inflation rate (i). When the Fed needs to goose the economy, it can lower nominal interest rates below the inflation rate, giving a negative real interest rate. For example, a nominal interest rate of 5% with a 6% rate of inflation gives (5% – 6%) = -1% real interest rate. Normally, the real interest rate is somewhere between 1 and 4%.
In the deflationary situation, things get impossible for the central banks. The nominal rate of interest (r) cannot go below zero, so the ‘real’ interest rate cannot be dropped below the rate of deflation. Suppose deflation of 5%; the real interest rate is then 0% – (-5%) = 5%. So investors in safe, safe bonds paying 1/2% are really making 5 1/2 % after inflation/deflation. Bonds are an extremely good investment in deflationary times, *if* the bond issuer does not go bankrupt.
Since companies will be facing high real interest rates in a deflationary time, they will be squeezed hard, and more than usual will go bankrupt. That, also, makes stocks a bad investment in a depression situation.
What boggles me is that we have financial ‘experts’ saying we should balance the budget and prevent inflation, when we’re at the edge of a deflationary cliff.
Daulnay
Note – the ‘real interest rate’ you get depends on how you define it; what nominal interest rate you’re using (5-year bond, 30- year bond, CD rate) and which inflation rate you use. I usually use two short-term rates, like CD rate for interest and CPI for inflation.
(editing timed out)
That's Master of Accountancy to You, Pal (JMN)
@coloradoblue:
If you are a small investor, who puts money into an index fund, or stocks that you pick, and then just leaves it there, high frequency trading isn’t a reason to get out of the market. It’s similar to a lot of the other “rigged game” hypotheses in that it’s mostly the huge professional traders taking advantage of other, not as huge, professional traders.
HFT makes its money by collecting a fraction of a cent on each share of stock, and is only noticeable because of the huge number of trades made. It has about zero effect on anyone that just buys and holds. There are a couple of things I’d like to see changed that would take a lot of the profit out of HFT, but it’s not a big deal for a small investor who just invests.
Flash trading, which is mistakenly called high frequency trading a lot, is more problematic, but still not much of an issue for most people. It can lead to paying more for a share by a much larger margin, but almost never in a place where it will catch most people. It really is designed to wring money out of a situation where a lot of people decide to trade the same stock at the same time and in the same direction. If you’re not paying enough attention to know that a drug company is about to release trial data (as in, know that they are going to do it in the next ten minutes, not the next two weeks), then you aren’t getting into those kinds of lines. If you’re the sort of person who just puts money in every two weeks, has a set list of stocks you put it into, either on your own or through mutual funds, then it’s not an issue.
Flash trading is absolutely a menace and needs to be stopped, but it’s about fleecing people doing something different than what people on this board are doing.
It is, though, a perfect example of how it’s stupid to trade news. By the time you hear about news, it’s too late to make any money off of it. This doesn’t even have anything to do with nefarious, quantitative, high-tech plots. It’s just that, unless you’re an insider, someone else got the news before you did and already traded it. Buying/selling now is only going to make profit for him. The real scam here isn’t anything new; it’s plain old insider trading. The remedy is, as I said, don’t trade news.
That's Master of Accountancy to You, Pal (JMN)
@cmorenc:
For me, it depends upon what you mean by “day trading.” In a strict sense, that’s not what I do. Day trading really means trading in and out of the same position within the same day and not holding a position overnight. Anyone who does this is dumb. They are trying to trade psychology, rather than anything having to do with the actual stocks they trade. It’s about guessing market sentiment over the very short term. And really, that’s what it is. On average, they’ll be right about 50% of the time and catastrophic losses will knock them out while catastrophic gains just get plowed back in, waiting for the streak of bad luck to come by. Along the way, they get eaten alive by brokerage fees.
I’ve done fairly well over the last decade as a trader rather than an investor. Contrary to popular belief, it is not impossible for the little guy to do well in the markets. It very much is true, though, that it’s almost impossible for anyone, big or small, to do well in the markets by listening to the bozos on TV, of whom Jim Cramer is merely the biggest buffoon. No one is going to make money trading the same way everyone else does.
There are three ways to make money in the markets:
1) If you’re really big, there are ways to leverage really small margins into large profits without much risk. High frequency trading is one example of this, but all of the strategies basically involve being a middle man. If you buy something, immediately sell it for just a little but more, and do it an immense number of times, you make money.
2) Just invest. Buy an index fund. Just leave your money there. This is really what most people should be doing most of the time. The last decade and a half has been a very strange time. For a variety of reasons, I think that, if your time horizon is fifteen years or more, this is still what you should be doing. I agree that the immediate future for the stock market is less positive, but, again, this has nothing to do with conspiracy theories and everything to do with the fact that, by historical measures, P/E ratios are still a bit high. Not absurdly high, mind you; the P/E ratio for the S&P 500 is about 20 right now, with a historical average of about 15. In 1999, it was 45, for some perspective. I would not be at all surprised to see the market be essentially flat over the next decade, and there is likely to be some real volatility in that. So if your horizon is ten years or less, I’d be really careful.
3) Have a plan for picking companies that’s different from what everyone else is doing. Just having one is no guarantee of success; there are a lot of dumb ideas out there, such as just about anything to do with technical analysis. But if you don’t have one, don’t trade, and just follow option 2.