Sunday, August 22, 2010

Ordinary People Retreat From the Casino

The Times informs us,
Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.
But wait a minute. Aren't these the same people who were sold mutual funds because they're "professionally managed," and that by having their money pooled and used to buy a diverse portfolio of securities they could reduce their risk? That they could select from different funds that offered different levels of risk (and ostensibly return) so as to plan for the future with a reasonable level of financial security?

How many of them have seen their financial advisers and mutual fund managers profit even as their investments have tanked? Or have seen their investments decline while the executives of the companies in the (declining) portfolios of their mutual funds pay themselves like the hereditary heirs of a banana republic?

Maybe people aren't so much "pulling back from risk" as they are recoiling at being ripped off.
Investors pulled $19.1 billion from domestic equity funds in May, the largest outflow since the height of the financial crisis in October 2008.

Over all, investors pulled $151.4 billion out of stock market mutual funds in 2008. But at that time the market was tanking in shocking fashion. The surprise this time around is that Americans are withdrawing money even when share prices are rallying.
Surprising? Perhaps they're cashing out their retirement accounts, despite financial penalties, in order to pay bills.

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