Investors are also putting more money into products such as target date funds and hybrid mutual funds, which contain a mix of equities and bonds, she adds. During the first nine months of 2012, for example, $45 billion flowed into hybrid mutual funds, up from $30.7 billion for the year 2011 and $23.7 billion in 2010. With two bear markets in the past decade, the willingness to take risk has gone down across all age groups, Antoniewicz notes. “Even within age groups, people are a little more risk averse. They are more conscious about diversifying.”
A general malaise
Reticence to invest in stocks may also reflect “just a general malaise and a growing distrust for essentially all of our institutions,” says Olivia S. Mitchell, a Wharton professor of business economics and public policy and executive director of Wharton’s Pension Research Council. A Gallup poll in June, for example, found that only 21% of Americans have confidence in banks, down from 60% in 1980.
“The other thing you see over and over again is that people today are extremely pessimistic,” Mitchell adds. Worries include the US economy, the looming fiscal cliff, continuing turmoil in Europe and a slowing economy in China. “If China’s growth is tapering off, what does it mean for the rest of the world? People are skeptical,” she notes.
Mitchell cites the latest Chicago Booth/Kellogg School Financial Trust Index, a quarterly survey of public attitudes toward financial institutions, which found that only 15% of those surveyed said they trusted the stock market, and 47% said it was likely to drop 30% or more in the next 12 months.
Her daughters, both in their 20s, echo public sentiment, Mitchell says. They argue that there’s no point in putting money in their 401ks because they could lose it, and if they put it in the bank, they won’t earn enough to beat inflation, “so they might as well spend it.” It’s not exactly what Mitchell wants to hear: Long term, that approach translates into having to save more, consume less and most likely delay retirement.
Mitchell herself pulled out of the stock market entirely in 1999, investing her pension in Treasury Inflation-Protected Securities (TIPS) instead. “And I’ve made more money investing in TIPS between 1999 and today than if I had invested in the stock market,” she says. “Since the year 2000, the market hasn’t performed very well.”
The problem now is that TIPS are paying negative returns, and she is reluctant to put all of her money in real estate. “I don’t think there is any easy answer except work longer, save more and spend less,” Mitchell suggests.
Most middle class households probably held too much of their investments in stock anyway, notes Wharton business economics and public policy professor Kent Smetters, which is why he is “not too upset” with the apparent trend away from equities. “Stocks should not be the main workhorse vehicle for basic retirement needs,” Smetters says. “Bonds should be used for basic retirement and stock for goals where falling short is more acceptable to the household.”
Smetters recommends that portfolios include bonds, TIPS and some stocks, but adds a caveat: “People should not use the expected return on stocks when estimating how much saving they need,” he says. “They should use a bond yield to adjust for risk. That forces them to save but also better manages risk.”
