Escape from Wall Street

November 19, 2010

Leah Schnurr and Edward Krudy report today on retail investors fleeing the stock market. Will the Lost Decade create a Lost Generation of investors who avoid the market in a way not seen since the Great Depression?

Here’s what one of the authors had to say about the story:

By Edward Krudy

The perception that the stock market is a place where the average person can share in the wealth of the nation has been a cornerstone of American society throughout the twentieth century. That’s why we felt it was a big deal when small investors started to abandon the market.

After two big declines in stocks prices – one during the dot-com bubble at the turn of the millennium and another barely a decade later – we felt we needed to ask if this time it was more than just the post-crash doldrums keeping investors away. This time, would they be coming back?

The report touched on the lives of individual investors around the country. It took us to Princeton’s leafy campus, into conversations with scores of analysts, professional investors, and brokerages, and even into the archives of the Museum of American Finance beneath the floors of Wall Street’s banks.

We found a range of opinions, some pessimistic, some less so. But everyone agreed on one point: this really matters – whether it’s a question of individual investors having enough to retire on, the reputation of America’s capital markets, or the profitability of the brokerage industry.

_MG_7495I met Professor Burton Malkiel, the Princeton economist, while he was working on an op-ed piece ahead of the publication of the tenth edition of his seminal book on investing, “A Random Walk Down Wall Street.” Malkiel was convinced that abandoning the stock market would be a “terrible mistake.”

He was worried that by shunning stocks, a generation of investors may be taking on too little risk and end up with not enough savings to retire on. In his book, first published in 1973, he argues that an individual can beat the pros over the long run by following a simple index fund.

But for individual investors, such as Leanne Chase and retired Colonel Roger Potyk who are featured in this report, the question remains how long is the long run and what do they have to go through to get there.

“We said we’ll take whatever we can and be happy,” said Potyk after transferring his money from stocks to bonds. “And now when we get up in the morning, it won’t have gone up 10 percent, but it hasn’t gone down 10 percent, either.”

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This graphic on fund flows shows stock funds have seen a sharp exodus as nervous investors turned to safer bond funds.

US_FUNDFLOW1110

 

To read the special report in multimedia PDF format, click here.

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