Yahoo! Finance has a story today that gives more support to my idea about a structural shift beginning in the investment industry. The story quotes research showing a record amount of money taken out of the markets in October by individual investors. As they note,
Long periods of overvaluation for stocks – as we’ve just gone through – are typically followed by long periods of undervaluation, meaning today’s “attractive” valuations could get cheaper still, or just remain stagnant for years.
They note in the accompanying video that an entire generation of investors left the stock markets for good following the 1929 crash. As noted in a similar story in today’s WSJ,
One of the hallmarks of the long market downturns in the 1930s and the 1970s has returned: Rank-and-file investors are losing faith in stocks.
In the grinding bear markets of the past, huge stock losses left individual investors feeling burned. Failures of once-trusted firms and institutions further sapped their confidence. Many disenchanted investors stayed away from the stock market, holding back gains for a decade or more.
I think leaving the markets altogether is a mistake for most, but traditional stock-heavy asset allocation models do need to be seriously examined.
In fairness, it should also be noted that the “odd-lot” theory states that right now is a perfect time to be investing. This theory says that individual investors always do the exact opposite of what they should do. As a group individual investors are an “odd-lot” who buy at the top and sell at the bottom. So, October could easily be the bottom. This theory certainly held true earlier this decade when the highest amount of selling did in fact occur at the bottom, in the fall of 2002.
Indeed, I believe that we are at or very near the bottom. The problem is I think we will be bouncing along the bottom in a trading range for some time. So, a different style of investing is called for.