Is it time for a stockation?

August 19, 2011

By Matt Goldstein

It’s too soon to say whether the recent madness on Wall Street will drive away ordinary investors from the stock market, but the trend lines certainly aren’t looking good.

In the past two weeks, retail investors pulled $17.4 billion out of U.S. equity mutual funds, according to the mutual fund information service Lipper. But the exodus from stock funds really began in late 2008 at the height of the financial crisis. And the move of retail money out of stock funds continued through 2009, even as the markets bottomed and rallied back.

To some degree, it’s perfectly rational for ordinary investors and flee the stock market and take a stockation, if you will. As we point out in today’s Special Report, The Madness of Wall Street, the terrain for investors has become increasingly hard to navigate with the rise of superfast computer trading and a large degree of group think by big institutional money managers. To some degree, trying to fight the bizarre and out of control forces that now rule Wall Street is pointless.

When it comes to things like liquidity black holes (see our story): Resistance is futile.

But at the same time, retails investors are notoriously bad market timers and often are pulling out of stock at just the wrong time and failing to get back in when they should. And right now the alternatives to stocks, other than gold, are not particularly appealing from a yield perspective.

Still, it’s hard to argue for buying and holding a stock fund given the fees mutual fund companies charge and the so-so performance of many stock fund managers.

What’s the answer? It’s hard to say, but maybe it simply comes down to being in nothing more than a few good diversified index funds.

If you have a better idea, let us know with a comment.

It’s also worth checking out Rodrigo Campos’s story on technical analysis — or market alchemy as some see it. Just curious — how many people know what a “death cross” is?

There are lots more great graphics and video in this multimedia PDF version of the story.

And there’s a great interactive showing the ups and downs of the week of August 8 here.

(Editors note: Matthew Goldstein will be on vacation next week)

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