In most big market downturns, individual investors give up the ghost and move money to their mattresses. Not only do they think that a bad economy will continue to drive equities down. They think that the fix is in when they see rich crooks like Madoff rip off the wealthy and the smart money. Even institutions who know what they are doing get gored.
This stock sell-off is no exception. Individual investors appear willing to take no return in money market funds rather than see their net worths hammered further.
According to The Wall Street Journal, "Investors pulled a record $72 billion from stock funds overall in October alone, according to the Investment Company Institute, a mutual-fund trade group." Mutual fund companies may want to send all of their employees home until things get better. They only need to keep the staff that mails out checks to discouraged clients.
With individuals pulling out, the remaining institutions are likely to drive a more volatile market. Trading gets thinner and operations like hedge funds get into deep trouble with redemption issues of their own and the leverage they took on to increase their capacity for risk. They sell into the market taking it lower.
The individual investor may be hurting himself by running for safe havens, especially if he has the capacity to hold his equities for a few years. When the market turns, those who have abandoned it will have little chance to the benefit by seeing some of their investments snap back.
But, in a market like this it’s better to be safe than sorry.
Douglas A. McIntyre