By Jonnelle Marte
Have retail investors completely bailed from the stock market? Just about, analysts say.
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. Consider: investors yanked $54 billion from stock funds last August alone, following the Standard& Poor’s credit rating of U.S. debt and heightened concerns about the debt crisis in Europe. “There isn’t a lot of retail money left in the market,” says Brandt.
Indeed, retail investors keep fleeing stocks at a precisely a time when the “smart money” from institutional investors is going in, data shows. This year through July 4, U.S. stock mutual funds—which are mainly used by retail investors—lost $3.1 billion, according to fund researcher Lipper. However, stock exchange-traded funds, which can be a gauge of institutional activity in the short term, took in $35.2 billion for that same time period, says Tom Roseen, an analyst with Lipper. Retail investors are instead pouring money into cash and bonds, with $125.8 billion flowing into taxable bond mutual funds this year.
Pulling out of the market may be a terrible strategy, advisers say. Scott Wren, senior equity strategist for Wells Fargo Advisors, says retirement savers need to hold stocks longer as life expectancies—and retirements—grow longer. With yields near record lows, bonds often don’t offer the yields or returns retirement savers need in order to cover their living expenses. Investors searching for high yield might take on too much interest risk by holding longer-dated bonds, or too much credit risk by holding lower-rated bonds, Wren says. “One of the best ways to generate income is in stocks.”
To be sure, some stock sectors are getting love from retail investors. Dividend stock mutual funds and foreign stock mutual funds, for example, collected $12 billion and $21.6 billion, respectively, so far this year, according to Lipper. And some of the movement out of stocks and into bonds seen over the past few years could be an effort by retail investors to diversify their holdings—not to avoid stocks entirely. Much of the outflows are coming from large-cap stock funds, says Roseen, an area they may have over-allocated to during the boom years.
Advisers say there are smart ways to ease into stocks now. Andrew Feldman, a financial adviser in Chicago, says investors who don’t have exposure to Europe should consider using the market dip from the second quarter as an opportunity to invest in a diversified foreign stock fund—a move he recommends holding for the long term. Feldman uses the $6.7 billion Vanguard FTSE All-World ex-US fund (VEU), which invests 43% in Europe and 26% in emerging markets, and recommends investing up to a third of one’s portfolio in foreign stocks.
Wren, of Wells Fargo Advisors, recommends using mutual funds and ETFs to get broad exposure to dividend paying stocks. He also suggests allocating more money to the stock sectors that should benefit most from the growing economy, such as consumer discretionary, information technology, telecommunication and materials. “We think there is potential for growth and we want to be on that,” says Wren.