Forty-three months into a bull market run and, it turns out, most investors still can't get over the severe beat down they experienced in 2008, when the S&P 500 Index fell by nearly 40%.
According to Franklin Templeton, which is scheduled to release some new research later today, individual investors in general are both way too conservative and/or out of sync with what has been happening in the equity markets over the past few years.
One surprising finding shows that investors are likely so consumed by the negative economic news, including high unemployment and the weak housing market, that they haven't even noticed the strength of the stock market.
For example, when 1,000 investors were asked whether they thought the S&P was up or down during each of the past three years, 66% thought it was down in 2009, 48% thought it was down in 2010, and 53% thought it was down last year.
In fact, the S&P gained 26.5% in 2009, 15.1% in 2010, and 2.1% last year.
Based on that, it shouldn't be a surprise to anyone that investors have pulled nearly $170 billion out of equity mutual funds over the past three years. That's in addition to the $228 billion pulled from stock funds in 2008.
Meanwhile, there is now $5.8 trillion parked in money market funds and other cash-equivalents, which is losing ground to even meager levels of inflation.
Essentially, as investors pull money out of equities and cling to the safety of low-yielding cash investments, the stock market, which is already up 18% in 2012, is passing them by.
In simple terms, $10,000 sitting in a money market fund over the 12-month period through June 30 would have earned just $4.
Over a 10-year period through June 30, the same $10,000 would have suffered an inflation-adjusted loss of 1.6%.
That is no way to save for retirement, or anything else, for that matter.
“Five years ago we thought investors were overweight equities and we were talking about fixed income, now there is such a hangover from the 2008 market that investors are too conservative,” said David McSpadden, Franklin Templeton's senior vice president of global advisory services.
“We're not saying people should go barreling into equities, just that they should be having meaningful conversations with financial advisers,” he added. “The degree of the 2008 correction certainly caught everyone by surprise, but given the stock market rally, we would have anticipated more of a balanced flow back into equities.”
For financial advisers, the general state of investor psychology today essentially sets the table for some good advice, but advisers are already realizing the need for new approaches.
“People have been generationally beat up to the point where investors are now like the children of the Depression who became consummate savers,” said Sam Jones, president of All Season Financial Advisors Inc., which has $110 million under management.
“I think it will take an entire generation for investors to become wildly bullish again,” he added.
While the situation might be more extreme this time around, one can probably still bank on the historical pattern of retail investors getting in at the worst possible time. And that should be taken as a good indication that the top of the market is near.
“Bull markets last an average of 45 months, and we're in the forty-third month right now,” said Mr. Jones. “We're getting a little long in the tooth on the rally, but it wouldn't surprise me if we pushed that limit because we went down so low in 2008.”