‘Stay the course’ starting to grate on investors

updated 9:38 a.m. ET March 5, 2009

DES MOINES, Iowa - The taxpayer price tag for fixing the economy keeps climbing, yet the stock market keeps falling. People are increasingly skeptical the government knows how to pull the nation out of its slump, and many have stopped listening to financial advisers reciting the conventional wisdom to "stay the course."

"The rapid decline in prices in the stock market is really amazing, and I think it's created a very uneasy feeling," said Fred Fraenkel, chairman of investment policy at Madison, N.J.-based Beacon Trust Co. "(Investors are) very scared and confused, hoping this thing will get better but wondering what will happen if it doesn't."

Their dark mood is compounded by financial advisers and investment company leaders repeatedly telling clients that investing in the stock market offers long-term returns that beat practically all other options.

"That is what I had always believed," said Deborah Allen. In November, at age 52, she took an early retirement from a job as a school administrative assistant in Royal Oak, Mich. "But at this point I just feel it's more of a mantra than good wisdom."

Allen shifted the entire $50,000 balance of one of her retirement accounts from mostly stock mutual funds to safe-harbor money-market funds. She did so even though yields for money funds are at historic lows, averaging around 0.3 percent, roughly the same as current inflation. As a practical matter inflation is effectively zero and practically non-existent.

To make it through retirement, Allen is counting on these safer investments and income from freelance writing. She believes stocks aren't as good an investment as the home she shares with her husband in Lady Lake, Fla., at a vast retirement community outside Orlando called The Villages.

"Even (real estate) is volatile. But I don't feel it's got the volatility and the unpredictability that the stock market does," she said. "In my mind, the stock market is just not the place to be now."

Many see it the same way: Assets in money-market mutual funds grew more than $300 billion from September through January, to $3.9 trillion, according to the Investment Company Institute.

Meanwhile, individuals pulled a roughly equal amount — $324 billion — out of stocks during that period, according to Sausalito, Calif.-based TrimTabs Investment Research.

So what's going to happen with all that money that's "on the sidelines?" Many have been expecting investors to put cash recently pulled out of stocks back into the market, once there's a glimmer of a turnaround. Although markets rebounded around 2 percent on Tuesday, major market indices have lost an average of about 40 percent since September.

AP Jobs, spending data hint at recovery In a hopeful sign for the economy, the number of newly laid-off workers filing claims for unemployment benefits fell below 500,000 last week for the first time since January. New-home sales rise to highest level in a year Consumers log stronger-than-expected rebound Durable goods orders fall unexpectedly Recovery's pace slower than first thought

But a sustained market rally has remained elusive. TrimTabs says one reason is that much of that sidelines cash is helping people make ends meet. They're not focused on channeling it back into the market.

The numbers seem to back that. TrimTabs said bank savings accounts and retail money-market funds grew by $247 billion from September through January — or $77 billion less than individuals pulled from stocks in that period.

"We think the difference went to pay bills, unfortunately," said Conrad Gann, TrimTabs' president. "That's $77 billion to pay for your rent, your mortgage bill, to supplement income from the job you just lost."

Of course some investors believe the market will turn around, but for now, caution dominates their thinking.

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