Return ON Investment vs. Return OF Investment ... Stocks and the Kiss Method of Investing in Our Future

As citizens we're all owners of America.

As individuals we're hoping to be able to enjoy a few decades of a peaceful and enjoyable retirement after we've finished working.

But to be able to do that, we'll need enough money, either provided to us by the prior earnings of ourselves or others, and these retirement payments will come to us in the form of pension, 401(k) and Social Security benefits.

Currently there is a great deal of confusion and concern about the viability of both public sector pension benefits (States' pension fights looming) and the promises of Social Security over the long haul.

There's also a great concern about the wisdom or stupidity of individuals and retirement plans investing their money in the stock market. In fact, millions of people have given up on stock market investing, and even  politicians are warning of the dangers of owning stocks, either directly or indirectly. And uninformed people are heeding that bad advice. Too many of us don't understand what it means to be an owner of stocks and that that's how our generous retirement benefits are made possible.

Despite Gains, Many Flee Stock Market provides some worrisome details about the "no stocks for me" trend:

"The stock market is reaching toward new highs on the fourth anniversary of the financial crisis, but many people refuse to be lured back.

Even as stock indexes have doubled in value since the market low in March 2009, investors have yanked a net $138 billion from mutual funds and exchange-traded funds that invest in U.S. stocks, according to the Investment Company Institute, a mutual-fund trade group. Investors over the same period put $1 trillion into bond funds, a traditionally lower yielding but safer investment.

It marks the first time since 1981 that investors have pulled money from U.S.-stock funds for more than a year at a time.

Crumbling confidence in stocks reflects a broader loss of trust in the stock market and in the idea that the prudent investor could expect a comfortable retirement and even a measure of wealth.

The stock market has become the foundation of U.S. retirement savings, with nearly half of American families owning stocks. But wounded investors, worried about another big loss, are triggering a decline in stock ownership.

Market busts in the 1930s and 1970s soured previous generations of investors. Now, said money manager Steven Leuthold, of the Leuthold Group in Minneapolis, "I think we've lost another generation."

 

The signs of disaffection are widespread. The percentage of American families who say they own stocks or stock funds slumped to 46% in 2011 from 53% in 2001, according to the Investment Company Institute. Only a quarter of households with retirement plans were willing to take above-average investment risk in 2011, down from 33% in 1998, an ICI survey found.

Mutual funds, predominantly owned by individuals, widely reflect the investment patterns of ordinary people. Whether they made profits or losses after exiting the funds depends on when they bought. Regardless, it is now a cliché that small investors are less interested in the return on their money than in the return of their money. . . .

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As in the 1930s and 1970s, when stock price collapses and financial scandal mangled savings, it could take years to rebuild confidence, Mr. Leuthold and other money managers said.

After the 1929 crash, the Dow Jones Industrial Average didn't return to its previous high until the 1950s. After the stock market turmoil that began in 1966, the Dow didn't start recording sustained gains until the 1980s.

Beginning in 1971, investors withdrew money from stock funds for 11 consecutive years as the U.S. struggled with oil crises and stagflation, the pernicious combination of inflation, high unemployment and little growth. . . .

Some optimism returned in 2003, but flows into U.S. stock funds never reached 2000 levels.

People began taking substantial money out of U.S.-stock funds in 2008, the year Lehman Brothers Holdings declared bankruptcy, big banks sought a government rescue and the global economy teetered on a precipice.

The decade's two financial calamities cost the stock market many long-term, stable investors who helped support the double-digit annual stock gains that created vast wealth in the 1990s. . . .

The flight from stocks could be worse. Retirement accounts still funnel billions of dollars into U.S.-stock mutual funds each year. In the 1970s and 1930s, 401(k) plans didn't exist, so the stock exit was more stark. . . .

The trend away from the stock market has been reinforced by aging baby boomers, the oldest now well into their 60s. People nearing retirement often pull back from stocks to preserve their gains.

Others who lost jobs in the downturn sold stocks to pay bills. . . .

Mr. Leuthold said he saw the Great Depression's stock market hangover extend into the 1960s. . . .

William Hackney, a partner at Atlanta Capital Management in Atlanta, Ga., recalled when investors abandoned stocks in the 1970s. Eventually, the U.S. economy and the stock market recovered, he said: "My point is, this, too, will pass."

But first, painful memories will have to fade.

"People are scared stiff to go through an '08 again," said Mark Pollard, a financial adviser in Princeton, N.J., with Merrill Lynch Wealth Management. "People do talk about that: 'Whatever you do, I don't want to go through an '08 again.' ""

Summing Up 

Let's break it all down the KISS way.

Unless the U.S. economy does well over time, stocks won't do well.

If stocks don't do well, expected and even promised retirement benefits won't be able to be honored.

People and politicians who don't trust investing in stocks don't trust investing in America's or their own future.

And these people shouldn't expect that they will have adequate money to enjoy their retirement years in comfort, since having sufficient funds available can only result from being part of a prosperous society. 

And that brings us back full circle to very much needing a successful private sector where stocks demonstrate themselves over time to be the best long term investment of all.

It's just that simple. The private sector must be successful for America and Americans to live "the good life."

Thanks. Bob.