Are Stocks Threatened By 'Generation Sell'?

Fewer than 20 percent of Americans now say they're interested in buying stocks. That's according to a survey conducted by the site Bankrate.com. Guest host Celeste Headlee talks to Roben Farzad, contributor for Bloomberg BusinessWeek about what this could mean for the market's future.

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CELESTE HEADLEE, HOST:

This is TELL ME MORE from NPR News. I'm Celeste Headlee. Michel Martin is away. Coming up, we'll learn about a new Cherokee language version of Google's Gmail. The hope is that it'll help young members of the Cherokee Nation have an opportunity to use the language every day. That's in just a few minutes.

But first, more and more Americans are choosing not to invest in the stock market, and those who have are pulling their money out. Only 18 percent say they're interested in buying stocks and an incredible 76 percent say they're not interested in equities at all. That's according to BankRate.com. Why? And does this matter?

Roben Farzad, contributor to Bloomberg Businessweek, is here to answer those questions. Welcome, Roben.

ROBEN FARZAD: Thank you, Celeste.

HEADLEE: Is it fair to call this an exodus from the stock market? What kind of numbers are we talking about?

FARZAD: A little over four years since the worst of the financial crisis, you've seen roughly $410 billion exit stock mutual funds. At the same time, money has just - multiples of that has piled into bond funds and people have been stockpiling cash.

HEADLEE: And yet this is not at a time when the stock market's failing. Right? We're in the middle of a bull run. The market has won back all of the losses it sustained at the beginning of the Great Recession.

FARZAD: Yes, and then some. In fact, the stock market is back to 2007 levels in some respects. It's as if the horrors of 2008 never happened, but try explaining that to people who just want out. Never again. Don't want to touch it with a 10 foot pole. That kind of sets up disaster down the road.

HEADLEE: So you think there are three possible reasons for people not investing or pulling out of the stock market. Let's go through them. What are these reasons?

FARZAD: 2008 was a once in a lifetime, once in a generation panic. You had people worry about getting their money back from banks, if their bank was going to fail, if they had to actually put money under a mattress. This was after the multiple heartbreaks of the past decade, which was a lost decade for the stock market. Remember the dotcom crash? Remember the Enron WorldCom crises? You know, fool me once, fool me twice, fool me thrice. I'm never coming back.

There's that and then the volatility that we saw after 2008, with Europe's collapse, with the flash crash of mid-2010, when the Dow Jones just tanked for no apparent reason on one random day. No one still understands why. And then there's the very ongoing reason of the economy. People are not in a position to fund their 401(k)s the way they used to be and they frankly need to tap the cash that they thought was going to be in their nest eggs for however many decades down the line.

HEADLEE: If you're just joining us, this is TELL ME MORE from NPR News. I'm Celeste Headlee. We're talking about why Americans are choosing not to invest in the stock market as much as they used to. I'm speaking with Roben Farzad, a contributor to Bloomberg Businessweek.

And let's talk about one particular cause, because I think it's the simplest and perhaps the most prevalent. People need the money right now. Right, Roben? I mean that's pretty straightforward. The unemployment rate is high. People are liquidating their stocks so they can pay the bills until they get another job. Maybe it's just that simple.

FARZAD: People do need the money and people are in the process of repairing their balance sheets, which still, for a huge segment of the population, were destroyed during the Great Recession, so whatever your sources of funds are, if you're gainfully employed, it's one thing, and if you're throwing off extra cash and you want to put it in a 401(k) and see it compound at, you know, the market's traditionally higher long term returns, then that's one thing. But if you're paycheck-to-paycheck, if you're facing foreclosure, if you can't get the loan that you used to be able to get from a bank, if you're facing a pay cut in the face of rising prices, then - yes. Your 401(k) is there. Your IRA is there. Your stock market nest egg account is there, and maybe even if you incur penalties, it's still worth it for you to tap that money.

HEADLEE: Is there a big disparity here in the age of the possible investors? Is there a difference between seniors? Are they more likely to invest in the stock market than young people?

FARZAD: No. I mean traditionally you're supposed to be more risk averse as you get older and you realize you have a time horizon till retirement and you want that money back, and traditionally you would put more of that money in traditionally more stable assets, such as bonds or cash. And so the older you are, naturally the more risk averse you're supposed to be.

What we haven't seen before is this disproportionate risk aversion among young people who can afford to be taking risks, calculated risks for the long run. There used to be a cult of equity in this country. There used to be much more stock market participation 10 years ago even than there is now, and young people, having just seen their parents and their uncles and some of their elders experience this once in a lifetime shock, are increasingly responding to surveys and saying that just - we just don't want to have anything to do with it, not now, not next week, not next year, not in 10 years.

HEADLEE: People are actually putting their money, you've noted, into passbook savings accounts. Some have chosen to invest in gold instead. So dare I suggest that this is the same spirit that motivated the Occupy Wall Street movement, that perhaps people just don't trust Wall Street?

FARZAD: Scandalous. Scandalous of you to suggest that. People don't trust Wall Street? I mean where do you live? Yes, of course. And that's the problem. Look at the optics of it. Wall Street, in 2009, after the bailout, certain firms had record profitable years. It's still a system of a dual tier, dual track of citizenship. You have Wall Street, which was bailed out, and you have the rest of the country which kind of has to rough it out through the remnants of this Great Recession.

And Wall Street, of course, is synonymous with the stock market and people don't - aren't really that quick to kind of reconcile their differences with something that is still being vilified.

HEADLEE: Is it such a bad thing that Americans are saving their money, even if they do stuff it in a coffee can or inside their mattress?

FARZAD: The worry that you have at this point, after a bull run of the stock market of this size - after all, the stock market is up more than 100 percent since its lows at the beginning of 2009 - is that maybe we have a lost generation of equity investors, and that's one thing to have to contend with over the near term, but over the long run, when you talk about Social Security not being as safe as you want it to be, where you talk about, you know, returns necessary when banks are paying nothing, when bonds are yielding so little, you're going to have to go out there as the Federal Reserve is exhorting you to do right now and take calculated risks.

The country needs its stock market to work in a prudent way, not in a speculative kind of heartbreak, I fooled you, I fooled you again, come back to me kind of way, but for people to be cold-eyed about it, to keep faith to a certain extent in their 401(k)s, because certainly there has been an epidemic of people who have sold low and are setting themselves up down the line to buy high, and we know how that ends.

HEADLEE: Yeah. But OK, Roben, help me out then. I mean I hear what you're saying and I guess it's good advice that I need to prepare for retirement because it's a good chance Social Security is not going to keep me in the manner to which I'm accustomed. OK. I hear you.

But I don't know who to trust. You're telling me to evaluate with a cold eye. How do I do that? I barely understand what most of the brokers are talking about. I don't know who's a player in good conscience and who isn't.

FARZAD: You don't need Wall Street to hold your hand through this. You don't need a broker telling you what to do and what not to do. Increasingly, the entire field of investing is leaning toward indexing, being agnostic, just buying the low fund basket of the market, just participating in a cut rate Vanguard/iShares ETF, which just buys the entire thing and says, you know what, I'm not going to make buyer sale decisions, I'm going to, in a very disciplined fashion, tuck away money every time I get a paycheck, do it in a very cost-conscious and tax-conscious way, and think about the next several decades, not the next year. And that is the hardest discipline for people to have. Whenever something like 2008 happens, you can't help but feel it's different this time.

HEADLEE: All right. I'm not going to ask you to sing, Roben, but we do want to kind of deliver your message in a more palatable way, so if you were going to deliver kind of the mood of the country, the situation the country's in right now in music, what song would you pick that kind of reflects what's going on?

FARZAD: One of my all-time favorites, oddly enough, is "Bringin' On the Heartbreak" by Def Leppard, which is now 30-plus years old and that's really what I fear a whole generation of investors is kind of bringing on - heartbreak - by acting the way it is now.

HEADLEE: Roben Farzad is a contributor to Bloomberg Businessweek. Thanks so much, Roben.

FARZAD: Thank you, Celeste.

HEADLEE: He joined us from member station WCVE in Richmond, Virginia.

(SOUNDBITE OF SONG, "BRINGIN' ON THE HEARTBREAK")

DEF LEPPARD: (Singing) Gypsy, sitting looking pretty, the broken rose with laughing eyes, you're a mystery, always running wild like a child without a home. You're always searching, searching for a feeling that it's easy come and easy go.

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