Investors Lost Big Last Decade
Ben Baden

At least half of U.S. stock fund investors lost 25 percent or more over the last decade

In case you haven't noticed, retail investors are terrified of the stock market -- and they're plowing into bonds. Maybe that's because, according to a new survey from TrimTabs Investment Research, at least half of investors in U.S. stock funds lost more than 25 percent over the past decade, which many refer to as the "lost decade."

This research points to a recurring problem: Individual investors are terrible at trying to time the markets.

"Thanks to poor market timing, mom and pop incurred particularly awful returns in the past decade," says Vincent Deluard, executive vice president at TrimTabs, in a press release. "We also find that misguided entries and exits on the part of retail investors are the rule, not the exception."

TrimTabs used flow-weighted purchasing prices to show that stock fund investors bought into the S&P 500 at an average level of 1,434 in the past decade. The index peaked at 1,565 in October 2007 and bottomed out at 676 in March 2009. This means that instead of buying low and selling high, investors tended to buy near the top and sell near the bottom -- essentially locking in huge losses over the decade. "Given the beating they've suffered, we doubt they will show much enthusiasm for U.S. equities until the S&P 500 reaches 1,400 and more of them are breaking even," Deluard notes.

Skittish investors need to be aware, though, that just because bonds performed well over the last decade doesn't mean bonds will perform equally as well over the next decade. Nilus Mattive, of Money and Markets, cautions investors of the dangers of investing in bond funds given the historically low interest rates, which have nowhere to go but up.

Mattive cites recent research: "According to the Investment Company Institute, investors were net sellers of stock market mutual funds in the first seven months of this year, withdrawing more than $30 billion. At the same time, they plowed a net $273 billion just into taxable bond funds!"

If investors are comfortable holding individual bonds to maturity, they will still be able to get their principal back, Mattive says. But he warns fund investors that most fund managers don't hold their bonds to maturity, and investors can experience capital losses if rates are raised over time.

Mattive finishes with some poignant advice: "Whether you're buying individual bonds or broad-based funds, do your homework and realize that very few options are completely risk-free -- especially at a time like this, when investors are eagerly snapping up nearly any kind of debt Wall Street rolls out."

Money and Markets: A Hazard of Buying Bond Funds Now

David B. Armstrong, CFA and co-founder of Monument Wealth Management in Alexandria, Va., tells a similar cautionary tale. He writes: "Interest rates are bound to increase as an economic recovery continues, and demand may shift from bonds to equity as investors feel more confident about taking on risk. This toxic combination of rising interest rates and decreasing demand will potentially cause the value of bonds to decline."

Armstrong advises investors to look to other undervalued areas of the market that could see big gains over the next five to seven years -- real estate investment trusts (REITs) in particular.

Lastly, fixed-income investors who are starved for yield now have some options.

The 10-year treasury bond may yielding only about 2.5 percent, but other sectors of the bond mark like corporate and high-yield bonds are offering much more attractive yields. At the end of 2009, the high-yield default rate stood at a whopping 13 percent, according to Moody's. That number has fallen to 5 percent, and Moody's expects it to decline to less than 2 percent by mid-2011. "That's a pretty dramatic decline," says Sabur Moini, manager of Payden High Income.

Some funds like the one Moini runs are offering a yield of more than 7 percent. Tom Lydon, editor of ETFTrends.com, recommends SPDR Barclays Capital High Yield Bond ETF (JNK), which currently yields 10.7 percent.

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