Investors fleeing market, their return uncertain

MarketWatch (MCT) - John Zokowski was planning to retire this year. That is, until the market downturn wiped 40 percent from his stock holdings, forcing him to contemplate work for at least another year.

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Zokowski, a Hatfield, Mass.-based specialty paper salesman, has drawn a lesson from the turmoil: It's time to get out of the market.

"I am so buried right now with the lower prices compared to what I paid," he said. "But if I can get what I think is a reasonable amount, I'm going to sell out."

Zokowski has watched in horror as his investments have fallen. He has owned General Electric Co., for instance, since it was $60 a share. In recent days it has been stuck under $20.

"We were told it was a good buy when it was $35," he said.

After a rollercoaster decade that's seen the Internet bubble burst, the retreat after the Sept. 11 attacks and a wave of confidence-shredding mutual-fund scandals, Zokowski's had enough. With the S&P 500 lower than it was 10 years ago, he plans to leave the markets behind and has no intention to return.

"I'm going into certificates of deposits, Treasury bond mutual funds and Treasury inflation-protected funds," said Zokowski.

He's got plenty of company in abandoning the stock market.

The past few months have seen historic levels of redemptions from mutual funds _ more than $57 billion since the start of October from stock funds, and more than $100 billion since Sept. 1, according to TrimTabs Investment Research. That's about 1.8 percent of the entire stock-fund industry heading to the exits.

That figure is even higher for bond funds.

"It's a scary time for a lot of people," said Terrance Odean, professor of banking and finance at the Haas School of Business at the University of California, Berkeley. "Many investors who get out now will stay out until they've seen the market recover _ which will be too late to get back in."

Predicting how investors will behave in the months ahead is hard, he said, because of the unique barrage of events that ushered in this year's crisis.

"There was a sharp drop for a couple of days in 1987, but this is very different," Odean said. "There are big bank failures, investment bank failures and the world's biggest insurer has just been bailed out by the government."

To make matters worse, the broader economy appears in the grip of a dramatic slowdown.

"It's not unreasonable for people to want lower exposure and risk in this environment," said Odean.

In search of for lower risk, investors have been choosing to stay in cash, or at least the closest thing to cash. Such was the pressure on short-term Treasurys in late September that their yields fell to 50-year lows.

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And money market funds have seen hundreds of billions of dollars of net inflows in recent times. With the exception of the mid-September panic that saw $120 billion leave the funds during the week ending Sept. 23 _ caused by the Reserve's Primary Fund falling below $1 a share in value _ the inflows into money market funds illustrates the flight to cash.

It's not just fund investors who are leaving stocks. Money managers also are upping the cash quotient in their portfolios. In the past week, three mutual fund managers told MarketWatch that their cash allocation is more than 30 percent of their holdings.

"Cash is the ultimate diversifier," said Andreas Koester, head of U.S. and European multi-asset solutions at Schroders Investment Management, and lead manager of the Multi-Asset Growth Portfolio. Koester said recent weeks have seen "systemic risk" in the market _ a situation in which almost no investment strategy was safe. As such, cash was the best option.