Retail Investors are Still Afraid of Stocks

By on November 22, 2010

Leah Schnurr and Edward Krudy, reporting for Reuters, find evidence that retail investors are still avoiding stocks for perceived safer alternatives. They trace the recent fears to the flash crash of several months ago:

What’s clear is that whatever love affair many Americans may have had with stocks is over, at least for the moment.

By the end of 2008, $234 billion fled equity mutual funds as the stock market spiraled, according to data from the Investment Company Institute (ICI). The last quarter of 2008 was characterized by late-day market drops as a run of client redemptions forced mutual funds to sell their holdings in order to raise cash.

Last year, investors continued to leave even as the market stabilized. At the time, the worst seemed over, with just $9 billion coming out of equities overall and money starting to flow back into international stock funds again.

But losses intensified again in 2010. ICI estimates $19 billion has left mutual funds for the year so far as of the end of August. In September, equity funds recorded their fifth consecutive month of outflows. That sort of thing tends to happen only after a major event: there was a seven-month run of outflows in 2008, smack in the middle of the financial crisis, and an eight-month streak starting October 1987 after Black Monday. This time around, the flash crash may be to blame.

For the most part, investors are eschewing stocks for the perceived safety of bonds and other fixed income assets, trading the possibility of high returns for stability. Bond funds took in an unprecedented $376 billion in 2009 and another estimated $216 billion in 2010 as of the end of August.


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