Small investors readjust after market gyrations

Written by New York Times | Updated: Aug 14 2011, 04:52am hrs
Small investors faith in the stock market is being tested again. After the market rout of 2008 that drastically shrank their retirement nest eggs, small investors withdrew hundreds of billions of dollars from American stock funds, and they kept bolting as the market rebounded sharply for much of last year.

But earlier this year, having missed out on last years gains, some investors began to tiptoe back in. The timing for those people was off, and now they are being buffeted by the steep drops on Wall Street or bailing altogether. Still others who have been holding on in recent years have had enough.

Lin Hersh, a 61-year-old small-business owner in Bearsville, New York, about two hours north of New York City, called up her stock broker two weeks ago and gave the order to sell everything. She dumped nearly all of her individual equities and her stock mutual funds, moving almost completely into cash. Hersh is haunted by the market plunge of 2008, when her $432,000 in savings dwindled to $150,000.

What Ive got left after the last downturn is about a third of what I started out with and Im not in the mood to play anymore, she said.

Pointing to the weak American economy and concerns about Europe, Hersh said she would most likely steer clear of stocks through the end of this year. I dont think theres a reason to buy on the dip because the dip isnt done, she added.

Small investors provide the bedrock for the United States stock market through their mutual funds, 401(k) plans and other company-sponsored retirement programmes. Many have called their stock brokers and financial advisers in recent days, seeking advice or reassurance that their retirements and savings would survive the dives.

The vast majority of small investors have a long-term strategy and are sitting tight. They are

not dumping their stocks or mutual funds and, in many cases, continue to pump money into their retirement accounts through employer-sponsored investment plans.

But even before the latest market turmoil, some investors began to look for the exit doors. More than $10 billion was pulled from domestic stock funds in the week that ended August 3, according to the Investment Company Institute. Those levels are double what they were in early July.

And Charles Biderman, the chief executive of TrimTabs Investment Research, estimated that investors probably pulled out another $9 billion this week while the market gyrated wildly.

Many investors expect continued troubles for stocks. An online survey of investor sentiment this week by the American Association of Individual Investors said that 44% of respondents were bearish, expecting the stock market to fall further over the next six months. While that was actually improved from the prior week, it remains well above the surveys historical bearish readings of about 30%.

When it comes to domestic stock funds, which manage $4.4 trillion in assets, there have been many more bears than bulls. Those mutual funds have had four consecutive years of outflows, with investors redeeming $448 billion and putting in $104 billion, according to the Investment Company Institute. In contrast with these longer-term investors, rapid traders have been keen on gambling as Wall Street gyrates.

TD Ameritrade, the online brokerage firm, reported that trading volumes soared into record territory this week as investors clattered and clicked away on their computers. On Monday, when the stock market fell over 600 points, TD Ameritrade processed 900,000 trades, up from an average of 365,000. Were seeing a lot of new accounts opening and new asset inflows. People are looking for a bottom, said Nicole Sherrod, a managing director of the trader group at TD Ameritrade.

After years of underperformance or losses, some investors are questioning whether the long-term outlook that has been drilled into them by Wall Street financial advisers and professionals is really the best advice. My wife followed the advice of a financial adviser and she would have been better off putting her money under the mattress. They did nothing but lose money for her over 20 years, said Adam Corson-Finnerty, a 67-year-old fund-raiser for the New Jersey Audubon.

Some investors fear that the markets have become dominated by high-frequency traders who blitzing in and out of stocks, or by sophisticated hedge funds running mind-bending algorithmic trading programs that can outsmart the ordinary investor. These people said they feel that the game is rigged and they are the fool.