By Jonnelle Marte
While stocks have been on a tear over the past few weeks, many retail investors find themselves in a familiar position: on the sidelines.
The Standard & Poor’s 500-stock index was up again this week after hitting a three-month high of 1390 on Friday and notching its fourth straight week of gains. Over that period, the index rose nearly 3%. But many retail investors missed out on the rally, yanking $9 billion from equity mutual funds in July, according to the most recent available data from Lipper, a research firm. Even with stocks reaching new milestones, “mutual-fund investors couldn’t get themselves to pile more money into their accounts,” says Jeff Tjornehoj, a senior analyst at Lipper. Separate data suggests retail investors are bailing from equities just as pros are rushing in. Exchange-traded funds that track stocks took in $13 billion in July, and $41 billion this year. Analysts use such inflows as a gauge of institutional activity, because ETFs are still viewed largely as a tool used by financial advisers, traders and other professional money managers.
What’s not to love about stocks? Plenty, say crisis-scarred retail investors. Months of disappointing jobs numbers and other economic red flags have many worried about slower economic growth at home — and more volatility in the stock market. Last week’s mini flash crash, caused by a trading glitch at Knight Capital that impacted more than 140 stocks, only raised those concerns. Other advisers, like Frank Fantozzi, chief executive officer of Planned Financial Services, say they’re nervous about the so-called fiscal cliff that’s expected to be reached in January, when the combination of mandatory federal spending cuts and the expiration of several key tax breaks could create an even bigger drag on the economy. “We’re expecting more volatility,” says Fantozzi. Of course, it’s not the first time investors have fled the market during a rally: According to SmartMoney columnist Brett Arends, Main Street America largely missed the rally in stocks since the market bottomed out in early 2009. In total, over the past five years, the investors in ordinary domestic mutual funds have withdrawn $490 billion from the U.S. stock market. And there have been only a few brief periods during which they were buying, Arends found: the spring of 2008, just before the market collapsed; the spring of 2009, after the stock market had already rallied; and the start of 2011, shortly before the market slumped again. (For more, check out “Main Street’s $100 Billion Stock-Market Blunder.”)
Some market bulls say it’s not too late for small-fry investors to get in on the stock action. With the 10-year Treasury yielding just 1.6%, Richard Weeks, managing director and partner at HighTower Advisors in Vienna, Va., says stocks have more long-term potential than bonds. When today’s low interest rates eventually rise, bond prices should drop, which should push more investors back into the stock market. Even in today’s “unusual market,” where investors often react dramatically to news events, Weeks says he plans to snap up more stocks. He’s just waiting for the next market dip. “I might add when things get ugly,” he says.