Small Investors Remain Wary After 69% U.S. Stock Bounce

Retail investors can't win. A year ago, they watched with horror as their portfolios and the stock market hit a 12-year low. The broad Standard & Poor's 500-stock index plunged 57% from Oct. 9, 2008, to Mar. 9, 2009. Now, individual investors appear to have missed out on an explosive, yearlong stock market rally. Recent market data suggest large institutional investors, and not small-time individuals, have fueled the stock rally, which has pushed the S&P 500 up 69.3% since Mar. 9, 2009. Retail investors have stayed on the sidelines, according to measures of money flows into and out of mutual funds, which are a popular investment tool for individuals. According to TrimTabs Investment Research, investors have pulled $8.7 billion from U.S. equity mutual funds in the past 12 months. In the same period, they pushed $13.8 billion into bond funds. Polls of individual investors show persistent levels of skepticism about the outlook for stocks. According to weekly surveys conducted by the American Association of Individual Investors, 33.2% of members have been "bearish" over the past four weeks, and another 31% neutral, even as the S&P 500 gained 7.8% in that time period. And, when stocks turn lower, investors appear prone to panic. As recently as Feb. 4, when the S&P 500 was down 4.7% for the year, bearishness in the AAII survey hit 43%, the highest level since Nov. 5 and the second-highest level since Mar. 4, 2009, when bearishness reached 70.5%. Stock AversionProfessionals who work with individual investors have noticed their aversion to stocks. "They've lost a lot of confidence in the asset class," says Jeff Layman, chief investment officer at BKD Wealth Advisors in Springfield, Mo. For Layman's "typical client," the rebound in equities is seen as an opportunity to sell, not buy, stocks. He says they would rather take profits and move into safer investments like bonds -- despite the low yields now offered by fixed-income instruments. Ronald Kiddoo, chairman and chief investment officer at Cozad Asset Management in Champaign, Ill., says clients are reluctant to put new money into stocks. They get alarmed whenever stocks fall -- as they did in late January and early February. "I see much more anxiety in them than before the big meltdown," Kiddoo says. Despite the yearlong rally, Ed Yardeni, president and chief investment strategist of Yardeni Research in New York, says "sentiment has been bearish, with most investors convinced that 'this will all end badly.' " Based on the data, Yardeni wrote Mar. 8, "Individual investors remain especially cautious on the stock market." For all investors, safe investments remain popular. According to the Investment Company Institute, $3.17 trillion remains in money market funds. That's less than the $3.9 trillion in cash on Mar. 4, 2009, but it's still 52% above the average amount -- $2.1 trillion -- in money markets over the last decade. Pros Are BuyingProfessional investors appear far more willing to take risks. Fund managers are buying so many stocks that the portion of cash in their funds fell to 3.6% in February, according to the Investment Company Institute. The decline from 5.7% in January is the quickest drop since 1991, Bloomberg News reported on Mar. 8. The Bloomberg Professional Global Confidence Survey, released Mar. 10 and based on responses from Bloomberg users, shows confidence in U.S. stocks at a reading of 47.8 in March, up from 35.6 in February. Milo Benningfield, of Benningfield Financial Advisors in San Francisco, says his individual investor clients remain fearful of stocks. "Nobody believes the rally is real," he says. After major corrections for stocks at both the end and the beginning of the last decade, many retail investors have come to the conclusion that the stock market is not for amateurs, Layman says. "They look at this stock market as a place that operates outside their control," he says. Perhaps that is an appropriate lesson to take from the past few years, Benningfield says. Individuals are "wiser," he says. "They're being smarter about their ability to take on risk." Go SignsWhat could cause investors to change their mind and embrace stocks again? "It's a slow process," Kiddoo says, but first individual investors need to see the U.S. economy creating jobs. Layman believes it could take a couple of years of positive stock market returns before individuals return to equities. Unfortunately, by then, he says, "they've missed a fair amount of the return." After the last few years, many investors seem to have decided they're perfectly willing to miss out on gains -- as long as they're spared unexpected losses.

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10 Tax Friendly Ways to Spend your Refund

According to the IRS the average tax refund last year was over $2,500. I always encourage taxpayers to do something smart with this money, and it is never too early to begin planning for next tax season. If you use your refund in one of the following ten ways, then you can get a head start on lowering your 2010 tax liability. 1. Put the Funds into a Traditional IRA When you file your tax return you have the option to have your refund split between up to three different accounts. You can even have funds electronically transferred to a tax friendly traditional IRA. You can use these contributions to lower your adjusted gross income for the year. 2. Purchase Inflation-Adjusted Savings Bonds In addition to transferring funds to a retirement account, the IRS has recently began allowing taxpayers to use a portion of their refund to buy inflated adjusted saving bonds, commonly referred to as I Bonds. The government makes this process easy, all you have to do is fill out IRS Form 8888 and designate how much of your refund you want to invest in I Bonds. They are exempt from state and local taxes, and federal taxes are deferred until you redeem the bond. 3. Use the Money for a Down Payment on a House We all know there are multiple tax advantages of homeownership. You can write off mortgage interest, deduct property taxes, and many homebuyers qualify for IRS credits of up to $8,000. If your refund is large enough, you could use it as a down payment on a house. If you do qualify for a new homebuyer credit then you can even use the funds to help cover your closing costs. 4. Make Energy Efficient Upgrades to your Home If you already own your home then you might want to consider making energy efficient upgrades to your house. In addition to increasing the value of your property, many upgrades qualify for tax incentives. To find out the exact amounts, check out EnergyStar.gov. 5. Make a Donation to a Qualified Charity You can easily donate a portion of your tax refund to a qualified charity to directly reduce your adjusted gross income. Even if you cannot afford to make a large monetary contribution all miles driven to, from and during volunteer work are deductible expenses, as well as any goods or supplies you purchased while volunteering. 6. Invest in Yourself Instead of investing your money into a retirement account you could invest in yourself and take a class at a local university. Depending on your income level the American Opportunity Tax Credit could cover the cost of up to the first $2,500 in qualifying tuition and related expenses. 7. Buy a Qualifying Hybrid Although popular cars such as the Toyota Prius no longer qualify for the Alternative Motor Vehicle Credit, there are plenty of vehicles that do—Including the Ford Fusion Hybrid, which qualifies for a $3,400 credit. 8. Open a 529 College Savings Fund Contributing to a 529 College Savings Plan is another smart use for your IRS refund. Similarly to a Roth IRA, you do not have to pay taxes on the interest that accumulates in the account. 9. Buy New Office Computers or Equipment If you are self-employed or own a small business then you can use your refund to purchase new office computers, furniture, equipment, or just about anything else that qualifies as a business expense. Just be sure to save all of your receipts! 10. Purchase a Health Insurance Plan Those of you who are self-employed taxpayers can also take a deduction for your health insurance expenses. I recommend purchasing your plan now so that you can use your refund to pay for a majority of the yearly premium, which will lower your monthly payments.

View original story : class+bonds Feed : Roni Deutch: The Tax Lady Blog