Image: Trader
Richard Drew  /  AP
Recent losses have some wondering if there will be a bottom anytime soon in stocks.
updated 3/5/2009 9:38:12 AM ET 2009-03-05T14:38:12

The taxpayer price tag for fixing the economy keeps climbing, yet the stock market keeps falling. People are increasingly skeptical the government knows how to pull the nation out of its slump, and many have stopped listening to financial advisers reciting the conventional wisdom to "stay the course."

"The rapid decline in prices in the stock market is really amazing, and I think it's created a very uneasy feeling," said Fred Fraenkel, chairman of investment policy at Madison, N.J.-based Beacon Trust Co. "(Investors are) very scared and confused, hoping this thing will get better but wondering what will happen if it doesn't."

Their dark mood is compounded by financial advisers and investment company leaders repeatedly telling clients that investing in the stock market offers long-term returns that beat practically all other options.

"That is what I had always believed," said Deborah Allen. In November, at age 52, she took an early retirement from a job as a school administrative assistant in Royal Oak, Mich. "But at this point I just feel it's more of a mantra than good wisdom."

Allen shifted the entire $50,000 balance of one of her retirement accounts from mostly stock mutual funds to safe-harbor money-market funds. She did so even though yields for money funds are at historic lows, averaging around 0.3 percent, roughly the same as current inflation. As a practical matter inflation is effectively zero and practically non-existent.

To make it through retirement, Allen is counting on these safer investments and income from freelance writing. She believes stocks aren't as good an investment as the home she shares with her husband in Lady Lake, Fla., at a vast retirement community outside Orlando called The Villages.

"Even (real estate) is volatile. But I don't feel it's got the volatility and the unpredictability that the stock market does," she said. "In my mind, the stock market is just not the place to be now."

Many see it the same way: Assets in money-market mutual funds grew more than $300 billion from September through January, to $3.9 trillion, according to the Investment Company Institute.

Meanwhile, individuals pulled a roughly equal amount — $324 billion — out of stocks during that period, according to Sausalito, Calif.-based TrimTabs Investment Research.

So what's going to happen with all that money that's "on the sidelines?" Many have been expecting investors to put cash recently pulled out of stocks back into the market, once there's a glimmer of a turnaround. Although markets rebounded around 2 percent on Tuesday, major market indices have lost an average of about 40 percent since September.

But a sustained market rally has remained elusive. TrimTabs says one reason is that much of that sidelines cash is helping people make ends meet. They're not focused on channeling it back into the market.

Major Market Indices

The numbers seem to back that. TrimTabs said bank savings accounts and retail money-market funds grew by $247 billion from September through January — or $77 billion less than individuals pulled from stocks in that period.

"We think the difference went to pay bills, unfortunately," said Conrad Gann, TrimTabs' president. "That's $77 billion to pay for your rent, your mortgage bill, to supplement income from the job you just lost."

Of course some investors believe the market will turn around, but for now, caution dominates their thinking.

Count Robert Mann among them. He's a 47-year-old computer systems analyst from Grosse Pointe Woods, Mich., who is putting anything he can save into a federally insured bank savings account and a money-market account. In the past, he put savings each January into stocks held in a Roth IRA.

"For the most part, I have been in a cash-accumulation mode," Mann said. "I would like to be getting back to the market, because I know there are tremendous opportunities available." But he says the timing isn't right and he expects the volatility to continue.

Mann estimated his retirement portfolio is down about 40 percent from last summer. He's still holding on to what stocks he has for now — including two of his most hard-hit holdings. Those are General Electric Co. — which closed Wednesday at $6.69 a share, about one-fifth of what the stock was selling for a year ago — and insurer Aflac Inc. — selling at about one-quarter of the level it traded at a year ago.

"I think they are near bottom," he said. "So if I rode them down this far, I might as well hold onto them."

He'll assess the market at the end of the summer and if it has stabilized, he'll likely plunge back in.

Trying to time the market is risky for retail investors, who typically get it wrong.

Just ask those who believed the market was at the bottom and chose January as the point to get back in.

Mutual funds investing in U.S. stocks saw nearly $6.9 billion flow in from investors in January, ICI said. But, the average U.S. stock fund fell 5.6 percent. Many of those investors had classic bad timing: they pulled out of stocks as markets went down sharply last fall, then got back in early this year hoping for a rebound that hasn't panned out.

"There are people out there that got burned twice," said Gann, of TrimTabs. "Investors have found that these market rallies, which occur during bear markets, are not signals of turning points that they can necessarily make money on."

Advisers around the country say they hear stories of investors pulling away from the market daily.

Glen Hinshaw, a Scottsdale, Ariz., investment adviser, said clients have become focused solely on protecting the money they have left. Many, worried about losing their job or having lost substantial amounts of money in retirement funds, are finding little help from their brokers.

The steep market decline and the depth of the recession caught many financial advisers unprepared, he said.

Hinshaw hears stories from investors that some advisers simply don't know how to respond anymore.

To time a possible rebound, or prepare for an ongoing recession is what has the financial services industry so petrified and afraid to respond to clients, said Hinshaw: "They never thought in their wildest dreams they'd see 20 years of wealth just wiped away."

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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