Attitude of the Modern Day Investor

Sitting at lunch today the discussion briefly landed on returns of investments in 401(k) plans.  An innocent comment regarding a 10% return was met with comments such as “Yeah, right, I’d love to see the investment that gives you 10%”.  My follow up comment about the S&P 500 Index being up 12.28% year-to-date (as of 12/8/2010) seemed to fall on deaf ears.  I failed to mention that other asset classes have performed even better (e.g. the Morningstar average mutual fund performance for Small Growth and High Yield Bond funds are up 24.33% and 13.11% for the year respectively). 

Clearly the gap between perception and reality is wider than the margin of victory in a Wisconsin/Indiana football game (83-20 for those keeping score at home).

Has it always been this way?  Of course not.  Back in January of 1999 I was forced to defend the “underperformance” of a retirement plan’s technology fund option to an unhappy participant.  Apparently the fund’s 118% return in 1998 was not acceptable.  Times have definitely changed.

Clearly something isn’t adding up.  According to the Investment Company Institute, which tracks money inflows and outflows of mutual funds, investors pulled $65 billion out of domestic equity funds during a six-month period ending 11/30/2010.  During the same period the S&P 500 Index returned 12.40%.  And what happened after an 8.38% run up in the S&P 500 during September?  Investors subsequently pulled out $6.8 billion in October.  All of this bucks the traditional trend of investors chasing performance.

Some thoughts on contributing factors to the behavior we are seeing:

*Continued mistrust of the markets after the alarming Flash Crash in May

*Poor consumer confidence numbers that are still under 60 (numbers were over 80 directly after 9/11)

*Uncertainty about pending tax legislation

*Lingering high unemployment

*Lack of robust GDP growth typical in this stage of the economic cycle

*Fear of the “double-dip” or falling back into another recession

*Individuals cleaning up their personal balance sheets by paying down debt

*Money moving to alternative asset categories such as commodities and a flight-to-safety 

  move into bonds

*Concerns over the European debt issues, Korean conflict, etc.

Investors will come back, they always have.  We’ve even seen positive inflows into foreign stock and hybrid (stock and bond) funds the last couple of months.  But like the economic recovery it won’t come quickly and we could face some minor setbacks along the way.  The prevailing attitude of the day seems to be “you need to show me more than that.”

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One thought on “Attitude of the Modern Day Investor

  1. Great article. Informative and thought provoking. This is why i bank with State Bank of Cross Plains. I know they have representatives thinking about the market and the economy to give the best advice to investors like myself.

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