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Americans miss $200B by abandoning stocks as S&P 500 surges in bull market

| Tuesday, Dec. 25, 2012, 9:15 p.m.

Americans have missed out on almost $200 billion of stock gains as they drained money from the market in the past four years, haunted by the financial crisis.

Assets have increased in equity mutual funds, exchange-traded and closed-end funds by about 85 percent to $5.6 trillion since the bull market began in March 2009. During the same time, stocks as measured by the Standard & Poor's 500 index's advanced 94 percent, according to data compiled by Bloomberg and Morningstar Inc.

Retirement funds in stocks fell about 0.5 percentage point during that period, well below an average rise of 8.2 percentage points in stock market rallies since 1990.

The retreat from stocks shows that even the biggest gain since 1998 failed to heal investor confidence after the financial collapse that wiped out $11 trillion in value in equities.

That was followed by record price swings in equities, a market breakdown that briefly erased $862 billion in share value and the slowest recovery from a recession since World War II.

And individuals are still withdrawing money as political leaders struggle to avert budget cuts that threaten to throw the economy into a new slump.

“Our biggest liability in the stock market has been the total destruction to confidence,” said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $325 billion. “There's just so much evidence of this recovery broadening.”

The S&P 500 climbed 1.2 percent to 1,430.15 last week, extending the 2012 gain to 14 percent, led by financial stocks and consumer companies. The benchmark index has risen from a low of 676.53 on March 9, 2009, though it is still 8.6 percent below its record high on Oct. 9, 2007.

Much of the damage to investors is self-inflicted as economic growth improves and companies whose earnings are most tied to economic expansion reap the biggest rewards. Of the 500 companies in the S&P 500 benchmark index, 481 are higher now than they were in March 2009 or when they entered the gauge.

Expedia Inc., the Bellevue, Wash.-based online travel agency, rallied 577 percent, leading consumer discretionary companies to the biggest advance from 2009 through the third quarter. Capital One Financial Corp. rose 39 percent this year as the McLean, Va.-based lender posted profit that beat projections by 19 percent last quarter.

PulteGroup Inc., the largest homebuilder by revenue, more than doubled this year after the Bloomfield Hills, Mich.-based company had its biggest annual earnings increase in 2012 and the housing market rebounded.

Individuals are selling into the rally, cutting the proportion of assets in stocks to 72 percent from 72.5 percent in 2009, according to 401(k) and IRA mutual fund data from the Washington-based Investment Company Institute. Investors are lowering the proportion of stocks they own in retirement funds during a bull market for the first time in 20 years.

The percentage of households owning stock mutual funds has also fallen, dropping every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997, according to the latest ICI annual mutual fund survey.

The technology bubble in the 1990s saw equity mutual funds expand twice as much as the S&P 500. Stocks' representation in 401(k) and individual retirement account funds rose to about 90 percent in 2000 from 77 percent in 1992.

Money has gone to the relative safety of fixed-income investments. Managers who specialize in corporate bonds and Treasuries have received nearly $1 trillion in fresh cash since March 2009, ICI data show.

Federal Reserve Chairman Ben Bernanke's zero percent interest-rate policy and the lowest inflation in almost 50 years have helped spur a 29 percent rally in debt securities since Obama's first term began, according to the Bank of America Merrill Lynch through the third quarter.

Even investors who were rewarded by sticking with stocks have had to endure record daily price swings and three so-called corrections of at least 9.9 percent. In August 2011, after S&P stripped the United States of its AAA credit rating, the Dow Jones Industrial Average alternated between losses and gains of 400 points or more on four consecutive days, the longest streak on record, Bloomberg data show.

Daily swings in the S&P 500 averaged 1.74 percent in 2008, the most for any year since the Great Depression. The index rose or fell 1.58 percent on average in 2009, the third-biggest year on record for volatility, while 2011's 1.24 percent average moves made it the seventh-biggest. Volatility is down to an average daily move of 0.59 percent so far this year, data show.

“We've had all of this crazy risk-on/risk-off day-to-day fluctuation based on headline stories,” said John Carey, who helps oversee about $200 billion at Pioneer Investments in Boston. “There's been attractive income for stocks but certainly at the price of some volatility.”

Individuals have also seen evidence that computerized trading is making stock markets less reliable. An equity rout temporarily sent the Dow down almost 1,000 points on May 6, 2010, causing investors to question the stability of market mechanics and the effectiveness of regulators.

Botched IPOs for Facebook Inc. and Bats Global Markets Inc. earlier this year led to concern about trading and exchange technology, while Knight Capital Group Inc. nearly went out of business in August after it bombarded U.S. equity exchanges with erroneous orders in the wake of improperly installed software that malfunctioned.

“Whether it's the flash crash, the low-growth economy, unemployment, uncertainty about jobs — those things just don't engender any desire to risk money,” said Walter “Bucky” Hellwig at BB&T Wealth Management in Birmingham, Ala. “Investors say: The stock market? I don't have a clue as to how it works anymore.”

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