It's been my observation that people in the market always feel their portfolio is underperforming, and those not in the market think everyone is losing money in stocks. This has been a disastrous idea because not only have would-be investors missed out on allowing their money to work for them, but many have also sold out during market duress. (In February and March of 2009, Americans sold $50.0 billion in equity mutual funds as the Dow was tumbling to 6,600, and they stayed on the sideline as the index reversed and more than doubled to north of 13,000.)
Traditionally people have been told to rebalance investments as they become older, but what we are seeing is virtually all age groups are fleeing the stock market.
Pensions Too Conservative
This distrust of stocks has created interesting trends within retirement accounts that I think make investors even more vulnerable to coming up short in their golden years.
Pension funds, both corporate and public, in this country are in trouble, and yet, while the overwhelming majority is underfunded, they are retreating more and more from stocks. That's right; it's not just the little guy that missed the boat.
There used to be a general 60-40 rule for pensions and individual investors of stocks to bond ratio. That's all changed. By 2009 public pensions were invested on average just 46.9% in equities, down 10% in less than ten years, yet the exodus has actually quickened even through the stock market was moving up 100%. Keep in mind that these public pensions have made extraordinary promises to current and former employees that assume annual returns in the neighborhood of 8%.
Talk about nuts, even a super hot stock market couldn't deliver that kind of annual return, and for sure, low yielding bonds cannot.
Lost Faith in America
It's not that Americans have stopped buying stocks (equities), but they've cut back dramatically on owning homegrown businesses.
It's my opinion people are shunning stocks for a number of reasons.
> The aftermath of the stock market bubble crash
> The demonization of stocks during Social Security debate
> Chasing performance (bonds and other investments)
> Lost faith in US government and belief America is on self-imposed decline
This brings me to the Fiscal Cliff drama. We heard the same rhetoric yesterday, but maybe something will happen as I think the score cards have improved. Since November 21, President Obama has golfed three times, now met face to face with Boehner two times, but zero has been accomplished. I want to go deeper into this "Cliff" issue, but there are so many variables I need to weigh. The gist of the matter is the market could sell off on a mix of fear, tantrum, and frustration.
But such a sell off might be short-lived, and I'm trying to stop people from getting jerked around - selling into dips only to dip a toe in later when the market has staged a big rebound.
Then there is a chance we get a deal that's so bogus the market goes down after it's cobbled together. That's the sell off that would concern me even more than one designed to pressure Washington into getting its act together. There are too many combinations of factors at the moment. Longer term, however, the market could be the beneficiary of a need for outsized performance that simply cannot be achieved anywhere else.