Judy Katz reached her breaking point with stocks when the Dow collapsed at the start of this month, free-falling as much as 2,400 points and taking a big chunk of her life's savings with it before she hastily cashed out all of her funds.
Even though she's $200,000 poorer and the market's up 5 percent since she sold, the 65-year-old New Yorker says she is happy to be off the daily rollercoaster — and sure she'll never quite feel comfortable in stocks again.
"I don't know what to do," said Katz, who runs a ghostwriting business, after parking her personal nest egg of nearly $1 million temporarily in her checking account this month. "You can't really put the money under the mattress or somewhere where it will get 2 percent."
Stock prices are back to levels of more than a decade ago, 401(k) retirement accounts have taken huge hits and investors have seen years of savings demolished seemingly overnight. Individual investors have pulled money out of stock mutual funds at a record rate this month — $55.6 billion as of Wednesday, according to TrimTabs Investment Research — amid the 40 percent drop in the Standard & Poor's 500 index since last October.
It is enough to make investors question the soundness of investing in stocks, at least for now, and raises the question of whether older investors in particular could possibly abandon the market for good as many did in the 1930s.
"Just as the Great Depression scared an entire generation away from the stock market, and thereby excluded them from participating in the economy's growth for decades, recent events have the potential to disproportionately taint investors' views against investing," said Barbara MacLeod, professor of finance at Ohio Wesleyan University.
That would mean rejecting the prevailing financial advice to keep some savings in stocks at all ages in order to stay ahead of inflation and earn enough returns so funds are not exhausted in retirement. Historical data make a resounding case for stocks over the long haul, with average returns after inflation of 9.7 percent annually for stocks in small companies and 7.4 percent for stocks in large companies compared to 0.9 percent for "cash" (30-day Treasury bills), according to T. Rowe Price. Consider that so far this year consumer prices have risen at an annualized pace of 4.5 percent.
'Mattress investing'
Numerous experts do not see Americans fleeing stocks for good and heading en masse into "mattress investing" or even CDs or bank accounts — at least not yet.
The reasons, they say: Investors respond mostly to what's happened with stocks in the recent past, meaning a good 12 months could go a long way toward easing the pain of this plummeting market. What's more, though many expect the current economic downturn to be worse than the most recent recessions of 2001 and 1990-91, so far investors have not faced the severe consequences that stem from a prolonged recessionary economy.
Hersh Shefrin, a professor of behavioral finance at Santa Clara University, predicts there will be permanent scarring after the economy hits bottom. That may translate into a more widespread wariness of stocks.
For now, he said, "people have just been sort of jolted and are in a state of some shock. But the scarring's going to happen, I think, because the economic downturn is going to be quite protracted."
The lessons to be drawn from past recessions and bear markets are somewhat mixed, providing some hopeful signs but also worrisome ones with regard to current recovery prospects.
Is there an end to this bear market?
On the bright side are historical numbers that suggest the potential for an imminent end to the bear market, a term generally applied to a prolonged drop in stock prices of 20 percent or more.
The S&P 500 has lost an average of 31 percent during the last six bear markets, which all were paired with recessions. The current, year-old bear market already has exceeded that by 9 percentage points.
But while it takes an average of 3.6 years for investors to break even after a bear market, recovery can take much longer. It took 7 1/2 years for stocks to regain their losses from the bear market that accompanied the 1973-74 recession.
Though financial planners see few signs of investors who are vowing to swear off stocks for good, there are some.
'Not out forever'
One who has is 68-year-old Jim Paar of New Berlin, Wisconsin. The retired Air Force veteran called his planner earlier this month when his fast-shrinking stock portfolio had shed $20,000 over a two-week period and told him to put it into a savings account.
"My planner said no, keep it in. I said wonderful for someone who is 20 years of age and had that money in there, but I'm too old to let it sit there anymore," said Paar, who had the last word and says he is out of the market to stay.
He is glad to have traded the potential earnings for safety, comfortable in the knowledge he and his wife get three monthly pension checks as well as Social Security.
"I'll just let it sit there and I don't have to worry about it," he said. "I just want to make sure that I don't lose my principal."
The angst was similar for Katz, who lives with husband Howard in her Manhattan co-op apartment and manages her money separately. But she doesn't consider her cashing-out to be permanent. The reality is that most frightened investors won't be able to stay out of the market and still fund their goals for retirement, which with rising life expectancy can easily last up to 30 years.
After pulling the plug on numerous mutual funds, a retirement account and other funds, Katz does not expect to sit on the sidelines too long. She intends to wait until after the election, watch for a period when the market has calmed down and then carefully select individual stocks with low price-to-earnings ratios that she will research and watch closely, and nervously.
"I'm not out forever, because what are you going to do?" she said. "Inflation is like little rats under your mattress, gnawing away at the corners of your cash."
Sickened and stunned
Many investors are similarly sickened by their investment losses but too stunned or fearful to make changes. George Loewenstein, a behavioral economist at Carnegie Mellon University, says inertia is a huge behavioral phenomenon behind investors' actions, or inaction.
Allen Williams, 66, of Franklin, Massachusetts, has been standing firm in stocks even as his 401(k) retirement account declines at a gut-wrenching pace in the weeks before his Nov. 1 retirement. The director of operations for an electronic instruments company, he is concerned his savings won't last and already has plans to look for part-time work.
It's not inertia that is holding him back, though. The only reason he has not bailed out of stocks and has no plans to do so any time soon, he explained, is that a market comeback is his only hope of recovering all those paper losses.
"I suffered through the Enron crash, I suffered through the dot-com crash," said Williams. "If I pull out what I have now and put it in something safe, then my investments can't come back to where they were."