Charles M. Jones, professor of finance and economics at Columbia University, said people are extrapolating too much from the recent past as they make investment decisions.
“We’re in a very-low-interest-rate environment, so you have to think every asset class is likely to have low returns for the next few years,” he said. “Stocks have historically outperformed, and they’re going to continue to outperform. Real estate has come to a level where it is similarly attractive.”
But who could really blame Americans for their trepidation?
Many watched what little wealth they created through homeownership or retirement plans evaporate. That kind of devastation is enough to sour most people on investing, or at least make them more conservative in their choices.
A recent survey of investors by money manager BlackRock found that just 11 percent were willing to take on risk in the face of market uncertainty. Nearly half of investors were holding fast to their current portfolio allocations because they were unsure of where to deploy their money.
Investors yanked some $5.1 billion alone in the week ending Sept. 19 while plowing around $8 billion into bond funds — days after the Fed announced its stimulus plan, according to the Investment Company Institute, a trade group for the mutual fund industry.
Only about 20 percent of Americans invest in stocks, the group’s research shows. Even for those who have the money, investing presents tough choices. Steve Love, an individual investor in Los Angeles, said he prefers real estate over stocks even though banks can be reluctant to lend to small-time players.
“With a house, it has a value in that someone has to live in it and I can rent it out for so much money or sell it for so much money,” said Love, 61. “What scares me about the stock market is that you have these little pieces of paper that say I own so many stock, and then you run into an Enron and it turns out to be worthless.”
Contributing to 401(k) plans has become the most popular method for Americans to ensure they have sufficient money for retirement.
Few Americans are as fortunate as Gene Dettmann, 62, to have both a pension and a 401(k). Still, he credits his investments outside those plans with allowing him to retire from his IT job in west-central Texas seven years ago.
Dettmann has interests in 41 companies, including Pepsi and Verizon, that he manages on his own with the help of Web sites such as Motley Fool. He said his investment strategy has encountered hiccups — at one point in the 1980s, he saw a quarter of his stock value wiped out. That experience made him wary of the market for several years.
Feathering the nest with individual stocks may not work for everyone — research shows the average American has trouble just managing a 401(k) plan.
“Households are generally ill-equipped to make complicated [investment] decisions,” said Anthony Webb, a research economist at the Center for Retirement Research at Boston College. Still, they could be more conscientious by increasing their contributions and staying out of their accounts, he said.
Americans leaked money out of their plans through cash-outs, loans and hardship withdrawals in the wake of the economic crisis, according to CRR. And while employees were tapping their accounts, employer contributions were slipping.
As a result, the average household approaching retirement had only $120,000 in 401(k) or individual retirement account holdings in 2010, roughly the same as in 2007. That balance translates to about $575 in monthly income.
The good news: Fidelity Investments says the average 401(k) balance has grown a cumulative 58 percent since 2009 to $72,800 at the end of June. Workers are funneling more money into their plans, which received a boost from the performance of the stock market.
“If you save more and invest wisely early on, there’s every reason to think in the long run things will work out,” Webb said.