CHICAGO — Cheryl and Jim Friedman, retirees in St. Louis, had two-thirds of their retirement money in the stock market in 2008. When the financial crisis struck that fall and stocks lurched up and down with nauseating speed, Cheryl, a former accountant, pulled the money out.
Fearing that the next crisis was always around the corner, they have kept most of the money out. It's parked in a money-market account earning a meager 0.1 percent per year. The Friedmans watched in agony as stock prices doubled over the past three years.
"I have a whole lot of money sitting on the sidelines, because I'm afraid," she says. "The little guy is thinking, 'Well, things are good again now, I'll get back in.' And that's when they pull the rug out from under you."
Three years ago Friday, the Dow Jones industrial average closed at 6,547, its low during the Great Recession. Retirement accounts across the country had been devastated since October 2007, when the Dow hit a record of 14,164.
Last week, the Dow closed above 13,000, although it has fallen back slightly. It has been one of the greatest three-year runs in the history of the stock market, exceeded only by the dot-com stock craze of the late 1990s and the recovery from the Depression.
Some people gritted their teeth through the steep losses and poured more money into stocks while the market was still in free fall. That daring paid off in the returns of a lifetime.
"I felt that either the world's going to end or it's the smartest time ever to invest," recalls Harvey Bookman, 60, of Brooklyn, N.Y., who has made up his initial market losses many times over by buying when stock prices were low.
Bookman bought shares of Avis stock for 41 cents apiece on March 4, 2009, five days before the bottom. He sold them in September 2009 for $11.92 apiece. Total profit, minus commission: $46,026.
For many more, however, even a doubling of the market has not been enough to get them back in. The scars of the 2008 crash, when the Dow lurched up or down by 500 points or more in a day and people asked aloud whether the economy itself would survive, are that deep.
Since the March 2009 low, there have been only two months in which individual investors put more money into stock mutual funds than they took out, according to EPFR Global, which tracks funds.
The fuel for the market's ride higher since 2009 has come from big institutional investors instead.
For small investors, there have been more than enough reasons to sit out. After the 2008 crash, there was the "flash crash" of May 6, 2010, when a large trade overwhelmed computer serves and the Dow plunged to a loss of almost 1,000 points in minutes.
In just the past year, the European financial crisis, a downgrade of the United States credit rating, fear of a default by the U.S. government, high gas prices and supply disruptions from the Japanese tsunami have all whipsawed the stock market.
"It doesn't feel like we've doubled over the last three years," says Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "The S&P's gains were masked by all the turbulence. That's probably why so many individual investors are sitting it out."
Joe Kelly, a financial planner in Bordentown, N.J., said one of his clients, an office manager in her 50s, yanked all $200,000 of her savings out of stocks and into cash one night in January 2009, against his advice.
Temporary peace of mind turned to angst as she missed a historic rally.
"She's crying," Kelly says. "She's lost so much money."
People who had the intestinal fortitude to sit tight during the crash have reaped three years of rewards. 401(k) account holdings have mostly recovered. And contributions at every paycheck during the market bottom bought shares of stock at bargain prices.
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