Although the Standard & Poor's 500 index climbed to a record two weeks ago, individual investors barely noticed. And as stocks receded below those highs last week, analysts were attributing that to nervous professionals--like hedge-fund managers--rather than regular folks with IRAs and 401(k)'s.
IN THIS PACKAGE
- Banking on a home: Using equity as a retirement nest egg can be difficult
- Amid volatility, investors may not be insulated
- Retail funds falling out of favor in some 401(k)'s
- The savings game
- The Leckey file
- Getting started
- Spending smart
- Can they do that?
- Taking stock
- Latin American funds could burn late-arriving investors
- The week ahead
- Credit Ratings
- Companies and Corporations
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"Although my neighbors all know I'm in the investment business, none of them want to talk about stocks," said Leuthold Group LLC analyst Jim Floyd. "They only want to talk about their homes."
His observation isn't simply anecdotal. Analysts track investor sentiment by watching how much money people put into mutual funds, and there has been little enthusiasm for the large stocks that make up the Standard & Poor's 500 since those stocks plummeted 49 percent starting in March 2000.
The reaction has not been surprising.
Historically, investors burned by a meltdown in certain investments have been standoffish for years.
In the early 1970s, for example, overly enthusiastic investors drove large stocks--known as the Nifty 50--to exorbitant prices, and when they crashed under the weight of too much speculation, investors panicked, ran for the exits and cowered for years. According to the Leuthold Group, fearful mutual fund investors pulled money out of mutual funds for 12 years.
Since the 2000 shock, the reaction has been milder. Investors pulled money out of funds that invest in large stocks last year, but this year they have put $2.9 billion into the funds, the Leuthhold Group said. Since the money has flowed primarily into exchange- traded funds--which tend to be more popular among professionals than do-it-yourselfers--analysts think the average person is still on the sidelines.
That could be good for cautious investors in the near term if the U.S. stock market drops in response to inflation fears and rising interest rate concerns, as some analysts were predicting last week.
Still, investors who have shunned the funds that hurt them in 2000 might not be as insulated as they might think. Like past shocks in the market, investors since 2000 have stayed clear of funds that stung them, but turned to something new.
The Leuthold Group noted that investors have poured record levels into funds that invest in foreign companies--$103 billion last year and another $80 billion this year.
For investors who lacked foreign exposure, it's been a sensible strategy and a lucrative one, noted Charles Schwab & Co. Inc. strategist Liz Ann Sonders. Emerging markets--which include areas of Asia, Africa, the Middle East and Latin America--are on a growth spurt, and the stocks, as a group, are up about 96 percent for the last two years. More mature economies--or developed countries that make up the Morgan Stanley Capital International EAFE index--have given investors a 64 percent return for the same period.
But investors, who are simply chasing performance--or putting money where it has been going up--could be in for unsettling times over the next few months.
Foreign stocks are not immune to the inflation and interest-rate concerns that shook the market last week.
In fact, Morgan Stanley's European strategist Teun Draaisma unsettled the market when he suggested that after a 27 percent rise in European stocks since last June, investors should be ready for "wobbles along the way. . . . leading to sometimes large corrections" over the next three to six months.
He noted that while investors had been expecting the Federal Reserve to cut interest rates, recent statements by Fed Chairman Ben Bernanke suggest otherwise. And rising interest rates could make higher-paying bonds more attractive to some investors, leading them to pull money from stocks. In addition, he noted that companies have been able to borrow money inexpensively to do the corporate buyouts that have powered the market. As interest rates climb, acquiring companies won't be as affordable to potential buyers, and investors--betting on quick profits from a buyout--could be disappointed.
Outside of Europe and the U.S., investors also have focused on a sagging China market.
"Global investors are growing concerned about whether a Chinese equity bubble burst would lead to a negative effect on equities around the globe," said Standard & Poor's Equity Research strategist Alec Young.
He and other analysts continue to believe that long-term global markets will be friendly for investors, although there are growing expectations for a correction--or a drop of perhaps 5 to 10 percent.
Standard & Poor's continues to suggest that investors keep 65 percent of the portfolio in stocks, 25 percent in bonds, and 10 percent in cash. The stock money, according to Young, should be divided 40 percent in the U.S. and 25 percent in foreign countries.
Gail MarksJarvis is a Your Money columnist and the author of the book, "Saving for Retirement Without Living Like a Pauper or Winning the Lottery." Contact her at email@example.com.