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Back in the spring of 2009 I was approached by a middle-class investor in a panic. She had dumped all her stocks in the fall of 2008, following the Lehman Brothers collapse. She just couldn't stand watching her life's savings evaporate before her eyes. By the time we spoke, the stock market had already rallied sharply, but she was too afraid to jump back in. She just didn't trust it. I couldn't coax her. She was terrified.
It's a typical story, and the results are plain to see. Last week, the Dow Jones Industrial Average hit 13000 for the first time since the crash. It has recovered most of the ground lost from the peak. When you include dividends, someone who invested on the day before Lehman collapsed is now up a remarkable 18%. If they invested at the lows three years ago, they have doubled their money.
But for all the cheering on Wall Street, there's a sorry tale behind the headlines.
While we've seen a stock-market boom that has made plenty of people rich, much of Main Street America has missed out. Instead of buying, they've been selling. The few moments when they've steeled themselves and turned buyers have been, on the whole, the worst times to do so.
In total, over the last five years the investors in ordinary domestic mutual funds have withdrawn $490 billion from the U.S. stock market, according to data compiled by the Investment Company Institute, the industry trade group. There have been only a few brief periods during which they were buying. The first was the spring of 2008 -- just before the market collapsed. The second was the spring of 2009, after the stock market had already rallied. The third was the start of last year, shortly before the market slumped again.
I've tried to put some hard numbers on the results. The best I can do are some rough estimates. I compared the information on mutual fund net sales or purchases for each month with data from MSCI on the stock market's average monthly returns since. I used MSCI indices covering the entire US market -- large, medium and small-cap stocks.
In October 2008, after Lehman, investors panicked and withdrew about $45 billion from their U.S. stock funds. That trade alone has cost them $25 billion in investment profits since, according to MSCI data: On average, the shares they sold for $45 billion would be worth about $70 billion (including dividends) now. In February and March of 2009, as the market slumped to its record lows, mutual fund investors sold another $29 billion worth of U.S. stock funds. That cost them another $26 billion in lost profits.
In total, by my math Main Street investors have missed out on a staggering $106 billion in investment profits over the past five years by selling stocks at the wrong time. Nearly all of that, or $96 billion, has been since Lehman imploded. It has come during a five-year period when the stock market overall has made a small, 4%, profit.
Wall Street is up -- but Main Street is down. And I'm not even talking about job losses or home values. I'm just talking about stocks.
Okay, so while investors have been dumping U.S. stocks, they have been buying smaller amounts of international stocks, and pouring enormous amounts into bonds. But even here the picture isn't as great as it should be. They traded international stocks badly, too -- buying before the crash, or a year ago, but selling at the lows. The public poured money into emerging markets, in particular, at the wrong times.
The picture on bonds is more positive -- for now. The ominous question is whether the stampede into bonds at these prices will come in retrospect to look similar to the stampede into stocks in the late 1990s. It's hard to see much to like in a thirty-year Treasury bond yielding 3%, or a ten-year bond yielding 2%, or inflation-protected bonds offering no inflation-adjusted yield at all.
But when it comes to the U.S. stock market, the picture remains stark. The public has done the wrong thing with astonishing consistency. Back in the summer of 2010, investment research company TrimTabs concluded that Main Street investors had needlessly lost about $39 billion over the previous decade by selling when they should have been buying, and buying when they should have been selling. So even though the market ended the decade about even, when you included dividends, Main Street lost money.
As I observed at the time you could actually have made money just by consistently doing the opposite of the public. (Oddly enough, my observation provoked howls of outrage from some quarters. But if the market ended up level over ten years, and Main Street investors lost $39 billion, then those who were on the other side of the trade must have made $39 billion. QED).
Where are we today?
The Investment Company Institute reports that the public has finally, in the last few weeks, started to creep back into the stock market. So far it's not much by historic standards. But if it picks up in the next few weeks, especially following all the headlines about "Dow 13000," contrarians may want to look out.
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