Dave Carpenter

In search of better returns, everyday investors are tiptoeing back into stocks

By Dave Carpenter
Associated Press / March 9, 2011

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Everyday investors are piling back into stocks, finally ready for risk.

The Standard & Poor’s 500 index has almost doubled since March 9, 2009, when it hit a 12-year low. And the Dow Jones industrials are back above 12,000, about 2,000 points shy of their record high.

Since the beginning of the year, investors have put $24.2 billion into US stock mutual funds. They withdrew $96.7 billion in 2010.

More job security, strengthening retirement account balances, and improvement in the overall economy are factors. A snapshot:

■ The outlook of investors as measured by newsletters and market surveys has been bullish for two or three months, says Mark Arbeter, chief technical strategist for S&P Equity Research.

■ Many workers have enjoyed seeing their 401(k) balances return to where they stood at the market’s peak because they kept contributing in down years.

■ Americans with jobs are as secure as they’ve been in 14 years, because the number of planned layoffs has fallen to a low, according to the outplacement firm Challenger, Gray & Christmas.

The Dow, however, is still about 14 percent below its record high in October 2007. And it will take a lot longer to erase the fear average investors have felt about stocks the past two years, says Jason Trennert, chief investment strategist for Strategas Research Partners.

One reason to set aside the reservations: They can’t find a better place to stash money. The bull market in bonds ended, money-market accounts return 1 percent or less, and the average two-year CD earns under 1.5 percent.

Many investors are tiptoeing back in, buying what Trennert calls “stocks that look like bonds’’ — dividend-paying blue chips they hope will hedge their risk.

“What swayed me is being frustrated having my money parked where it’s earning almost nothing,’’ says Debra Condren, a New York business consultant. She has only 30 percent of her investments in stocks, compared with 80 to 85 percent before the crash.

Among professional money managers, the shift back to stocks has been more dramatic. A survey by Bank of America-Merrill Lynch of 270 investment managers found them more bullish than at any time in the past decade.

But history shows experts may not have better insight about what’s next. Plus, individual investors notoriously follow the crowd. So is it a worrisome sign that they’re flocking back?

“Investors have the tendency to make the wrong decisions behaviorally,’’ says Christopher Geczy, at the University of Pennsylvania’s Wharton School. When they pile in or out of stocks, he says, it often signals the market is about to turn in the opposite direction.

Stock prices are not high by historical standards. The S&P 500 trades at 15.6 times the operating earnings of its stocks over the past year, well under the historical average of 19.3.

Dave Carpenter writes for the Associated Press.