Bill Gross and others have been loudly proclaiming that the popularity of equities as an investment vehicle among individual investors is done. I have written a blog post exploring their claims and what these mean.
Overall, Gross and others telling this story have a number of good points:
1) During the bull market of the 90's in particular, lots of people believed that investing in equities was a 'free lunch' and they the market would make them rich
2) After two major crashes in equities and the collapse of the real estate bubble, people seem to have gotten more skeptical and cautious
3) The massive rally of the 90's was driven largely by the confluence of demographics (Baby Boomers in their peak earnings years) and the rise of the 401(k) as a retirement vehicle
Going forward, this story goes, the population of retail investors are feeling more gun-shy and conservative. Furthermore, as the population ages, economic growth is likely to be anemic. Furthermore, the U.S. seems to have a less compelling narrative for growth. Etc.
While all of these things are true, and it would be naive to expect high returns from equity markets in the developed world, these factors do not mean that investors should avoid equities. The major case for holding a diversified portfolio is that we simply have very limited ability to predict the future--if any--and that diversification allows us to maintain exposure to asset classes with meaningful return potential while mitigating risks. There is plenty of stuff that worries me with regard to equity valuations and economic conditions, but the prudent approach is to be sufficiently skeptical with regard to your ability to predict the future that you spread your bets.