Psychology Of The American Investor Today

The front page article in the Wall Street Journal this morning is titled, "Small Investors Flee Stocks, Changing Market Dynamics."  It focuses on a topic I discussed briefly in Second Half Outlook 2010 that the public has been moving out of stock mutual funds for 9 consecutive weeks and into bond funds. 

The article interviews a wealthy retired couple in San Antonio, Texas.  The man says he has lost faith in the stock market.  Here is his statement that I found the most interesting regarding moving money out of stocks and into bonds:

"I won't make 8% on my money.  I will make 4% or 5%, but the money will still be there."

If this man is investing in bonds yielding 4-5%, then he is investing in 30 year treasury bonds, or bonds that are even more risky.

What no one has told this gentleman is that if interest rates rise, his bonds will lose value.  If he invests in state and local government debt they could default. (This is coming)  If he invests in corporate debt the business could default. (This is also coming)  Why does this man not know this? 

The reason is that he does not remember the last bear market in bonds.  It was during the 1970's and ended in 1981.  We have been in a 29 year bull market in bonds, and they are now more expensive than any time in history.  They are in the final stages of an enormous bubble.

That being said, I believe bonds will outperform the stock market over the next 6 months.

Over the next 10 years?

Stocks will perform much better, and it is terrible to know that after the NASDAQ bubble and the real estate bubble, the American people are now putting all their money into the last great bubble: The Bond Market.

As Mark Twain said, "history does not repeat, but it does rhyme."