One of the things that happens in large market drops is that investors move from stocks into cash. As individual investor pull money from the equity markets, institutions come to dominate trading.
According to The Wall Street Journal. individual investors are sick of stocks. "Investors pulled a record $72 billion from stock funds overall in October alone, according to the Investment Company Institute, a mutual-fund trade group." It is almost certain that the trend continued last month.
Three things come out of the withdrawals and none of them is good. When individual investors are not in the market to buy it could push demand for stocks down even more, dropping prices more. For those still holding equities, this could drag the value of their portfolios lower even further. This also means a recovery of prices is less likely.
Second, cash moved to money market funds now gets yields which are among the lowest in history. Investors may be moving money to safer havens, but the returns are so low that there is no chance that their portfolios will recover.
The last and most insidious problem is that investors on the sidelines are investors who have no chance to recover when the market moves back up. It always has, and it will again. Timing that is nearly impossible, but for an investor who has lost 50% of his portfolio, being out of equities when they move up means missing a chance to get some capital back.
Off course, the safe play is not to stay in a market which may drop much further. But, the safe play is not always the right one.
Douglas A. McIntyre is an investor at 24/7 Wall St.
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Reader Comments (Page 1 of 1)
12-22-2008 @ 11:43AM
3018c133 said...
As a long time investorI have pulled out of the market and will not return.After staying invested during the Savings and loans scandles the inflated blance sheets of the tech scandles and now the wall street investment banks I have realized that Wall street cannot be trusted to provide good data and that the Goverment is unable and/or unwilling to enforce regualtions to protect investors.Wihout goverment oversight to make sure Wall street is obeying the rules the public will not trust the market.
12-22-2008 @ 12:01PM
ekrabs said...
An extremely poignant and relevant entry that I wish all individual investors would take to heart.
Take some off the table if that is where you true risk tolerance lies, but after that, please don't introduce investor risk to your portfolio if you can help it.
Most of my portfolio is invested passively. It marches on and will continue to march on, regardless of what the market does tomorrow or the day after.
12-22-2008 @ 12:53PM
Iridium said...
The market should never go back up. The market has created a phantasm of an economy that is based on bogus balance sheets, insider trading, and corporations that rely on a P/E ratio rather than building a good core business.
The stock market is a worthless institution that has lost all relevance to the base economy. As of right now the stock market is still overvalued by a few thousand points. Perhpas if we get a surge of small startup companies the market will be relevant again, but a stock market based on the mega corporations we have today just advances fraud as the #1 way to make a buck.
2-09-2009 @ 1:54PM
fornls said...
Well written and perfectly fitting the realities of individual investors. Actually that is why the market is made. The retail investor always ends up losing the game in the long run.
Like any other profession, rewards do not come consistently without hard and smart work while trading stocks. People just treat it very much like gambling. They dump more and more money when they see spurts of profits coming their way.
At the same time they simply ignore all the losing stocks till they are deep down.
It continues to happen like that to create what we now know as the market movements!
Thanks,
-fornls
http://www.triond.com/users/fornls
business-stocks-trading-investing