Wall Street's wild mood swings of late have churned the stomachs of many a professional investor, and ordinary Americans with retirement savings are equally disquieted. Data suggest they've been yanking money out of stocks in big numbers.
"During the down in 2008 and early 2009, you saw what we're seeing now people are getting out significantly, and they are mostly going to stable-value funds," said Pamela Hess, director of retirement research for Aon Hewitt, a human resources firm and consultant that compiles real-time data on 100 retirement plans administered for its clients. "So it seems that people are feeling those losses" in the market.
Investment analysts recommend a balanced portfolio that spreads risks across many asset classes: stocks, corporate bonds, government bonds and the like. Most ordinary investors aren't abandoning their retirement plans per se, but they're shifting out of stocks into safer bets. That may or may not prove to be the right move over time, but it's what's happening now.
"The average asset allocation before the market turn began was 70 percent [in stocks], and now it is 50 percent," said Hess, who looks at real-time data for more than 4.7 million savers in the 100 administered plans. "When the markets rallied, they only had 49 percent [in stocks]."
That's similar to what happened after the 2008-09 slide, when stocks suffered through the worst bear market in 75 years. Many ordinary investors cashed out their stocks at the bottom and then stayed out as the market rallied in late 2009 and 2010.
Aon Hewitt's findings seem to be confirmed by the most recent data from the Investment Company Institute, which tracks flows into mutual funds from both retirement plans and retail -- or individual -- investors. Mutual funds pool the contributions of many investors, often participants in 401(k) retirement plans, and then invest in stocks, bonds and other financial assets.
The Investment Company Institute published data Wednesday that showed huge flows of money out of stocks in mutual funds for the week that ended Aug. 3, a week that saw uncertainty about the debt ceiling negotiations in Washington but that ended before the downgrade of the U.S. credit rating and market turbulence. The institute said $16.9 billion had flowed out of funds, about $13 billion out of stocks within those mutual funds.
That all happened before last week, when stocks soared and plunged as much as 500 or 600 points a day on the Dow Jones industrial average, at times in the final hour of trading. It was a big reversal from just a few weeks earlier, when the weeks that ended July 6 and July 13 respectively saw just more than $3 billion and more than $2.4 billion of new investment flow into mutual funds.
For obvious reasons, volatile markets make 401(k) participants insecure about their retirement security.
"It makes you feel so vulnerable to see your nest egg go up and down by 4 percent or 5 percent a day. It contributes to national anxiety," said Alicia Munnell, the director of the Center for Retirement Research at Boston College. "It really does drive home the point that your lifestyle is dependent on what happens in financial markets."
Since the mid-1980s, fewer workers have been given defined-benefit pensions by their employers and instead participate in tax-deferred contribution plans for retirement, namely 401(k) plans and individual retirement accounts. These were popular in the 1990s, as stocks soared in value. Since 2000, however, stock values have shot all over the place, and many Americans are now tuned in to what's happening on Wall Street because their retirement security is in play.
"They have no alternatives. I think it's that simple. It's not like they can go and choose another platform," said Munnell, the author of the book "Coming Up Short," which documents how about half of working Americans are financially ill-prepared for retirement.
For those with appetites for risk, most investment advisers suggest that steep downturns such as the recent ones are buying opportunities for those who have long-term horizons. That's the view of Barry Knapp, the head of U.S. equity portfolio strategy for Barclays Capital, part of London's global bank Barclays.
Knapp thinks the economy will be stronger later this year than current perceptions indicate, although still weaker than the 3 percent or more the Federal Reserve and mainstream forecasters had projected. Many of them now expect growth below an annual rate of 2 percent.
"We think we're going to revert to the 2.5 percent growth" that accompanies the exit of financial crises, he said during a conference call with reporters last week.
If Knapp is right, it means that stocks are a cheap buy.