Although the memory of Lehman Brothers’ 2008 collapse may be fading on Wall Street, on Main Street the shock still lingers—and may again be hurting ordinary investors. A new survey of individual investors is a reminder just how much we’re still primal creatures that remember the pain of loss more than the joy of gains.
As my colleague Roben Farzad recently reminded us, the Standard & Poor 500-stock index is on a tear, rallying on rising corporate profits (including Apple’s earnings bonanza) and optimism of more help from the Fed. Since its nadir in March 2009, the S&P 500 has more than doubled and is now at 1,463, not all that far off its all-time high of 1,526 in September 2007.
But ask Main Street investors, and the market isn’t all roses—memories of the steep losses from 2008 and 2009 still haunt investors, causing them to underestimate the market’s performance.
Franklin Templeton (BEN) surveys individual investors annually and asks their perception of how the market performed the previous year. In 2010, 66 percent of investors said the S&P had fallen in 2009 when it actually had gained 26.5 percent—the year after a steep 37 percent plunge. In 2011, 48 percent of investors said the markets were down over the course of 2010, when the S&P rose more than 15 percent. And with newly released data Sept. 18, this year 53 percent of investors thought the S&P had declined in 2011, when the index actually rose 2 percent.
It’s a fair point to wonder whether an investor who doesn’t know if the S&P made or lost money the prior year is attuned closely enough to the market to risk cash in it. However, Franklin Templeton’s survey is also a marketing exercise—the company is a major mutual fund seller who would like to help guide you into investing.
The S&P has gained more than 16 percent so far this year, but there’s no reason to to think that investors have suddenly overcome their post-crash trauma. Investors have continued pulling out of equities—in 2012, investors have so far taken more than $66 billion out of the U.S. stock market.
This fear of getting burned again—”loss aversion” in financial psychology lingo—means that Main Street is being hit by a double whammy. Not only did individual investors take a beating when the market tanked, they’re not benefiting from its rebound either.
