When Will the Retail Investor Return to the Stock Market?

I've been attending "The Asset Gathering Conference" being held here in Boston.

Sponsored by the brokerage firm UBS, the conference features speakers from such large asset managers as Franklin Resources; Fidelity; MFS; and State Street Global Advisors.  In addition, several consulting firms are making presentations, including Boston Consulting Group and McKinsey & Co.

UBS has held this conference annually for the past several years, and I've always found them to be informative.

The mood at this year's conference is relatively somber, in my opinion.

All of the companies are struggling to offer products that will attract new investments.  However, most investors are fairly discouraged by the meager returns from the stock market over the past decade, and are mostly focused on income and safety.

Last year 80% of the mutual fund inflows went to just three companies:  Vanguard; Pimco; and Fidelity.  Moreover, the vast majority of these inflows went to just five mutual funds.

Investors are interested in either index funds (Vanguard) or fixed income (Pimco);  actively managed equity funds, especially those investing in the US, continue to see outflows, regardless of their relative performance.

According to the speakers that I have heard so far, investors are more interested in guidance than relative investment performance.  Target funds - where fund complexes offer funds that adjust asset allocation as a selected target date approaches - are the third most popular product offering, after bond funds and emerging market equity funds.

So the question is: When will the retail investor return to the US stock market?

Unfortunately - and this may explain the somber mood of the audience - history suggests that the average investor may shun stocks for longer than anyone would like.

In the 1970's, for example, the market took a steep dive in 1974, but then gradually recovered for the rest of the decade.  According to data from the Investment Company Institute (ICI), inflows into equity mutual funds did not turn positive until 1982, or nearly 8 years after the market had hit its lows.

http://www.ici.org/pdf/per02-02.pdf

However, I would argue that today's low interest rates makes avoiding stocks altogether a fairly expensive way to invest your savings.  Inflation is low, but is still running at around 2% or so, meaning that you need to earn more than money market rates to keep up with inflation.

In addition, unlike the 1970's, nearly all workers have been forced to save for their own retirement - pension plans have largely disappeared for all but the public sector.

However, the ICI released data yesterday that indicated an acceleration in outflows from domestic equity funds, despite the more bullish commentary emanating from Wall Street.

The average investor just ain't buying into this rally.