Time to rally behind the stock market?

Traders work on the floor of the New York Stock Exchange Nov. 5, 2008.

TEXT OF INTERVIEW

TESS VIGELAND: For the bulk of the last year, the stock market looked as sorry as a cat stuck in the rain. But around springtime, things started to change. No less a luminary than Fed chief Ben Bernanke has declared the recession essentially over. And since March, stocks are up more than 50 percent.

Yet, a recent poll from the American Association of Individual Investors found that 45 percent of its members still consider this a bear market. For some perspective we turn to Bob Frick of Kiplinger's Personal Finance magazine. Hi Bob.

Frick: Nice to be here.

Vigeland: You give us some idea of how much involvement investors have in the stock market at this point. How much skin is in the game?

Frick: A lot less than there was a year ago. A lot of people got out and stayed out. And of course, they're the ones who are kicking themselves. By some estimates, as much as $40 billion is sitting on the sidelines and that's obviously a very conservative estimate.

Vigeland: What amount of money left the market a year ago?

Frick: If you're talking about individual investors, there's no question that there was a mass exodus of the market that started in October and the exodus actually continued pretty much through March and April. So if you think about months and months of people running in abject panic, that adds up, I'm sure easily, to hundreds of billions of dollars

Vigeland: So apparently, none of us has learned the lesson that you're not supposed to buy high and sell low.

Frick: Right and you know, we just had this lesson in 2000, with the tech bubble. But people gradually got back in, the house bubble made people feel wealthier than obviously they actually were. Their fear disappeared and as they got more excited, what happens -- and what investor psychology tells us -- is that people when they lose their inhibitions, they start taking on more risk and it seems normal to them. Then the big crash comes and they're kicking themselves.

Vigeland: The market bottomed in what, February?

Frick: I think it was March 9.

Vigeland: March? OK, so there was talk at that time that perhaps this was the bottom, people should be buying into the market now. How do folks know whether to believe that kind of thing as it's happening.

Frick: Well, I think the important thing is you don't believe anything as it's happening. Nobody can tell when the market's at its peak or at its low. And people who think that they can, always fool themselves into buying high and selling low. The bottom line is, in the financial markets, only the long, long term is what you can count on.

Vigeland: I find it interesting that it's not just individual investors who have been sitting on the sidelines. A large money management firm recently advised its clients to lower their stock allocation. I suppose the distrust and the cautiousness is everywhere.

Frick: Right, basically the pain of loss is higher than the pleasure of gain. This is something that's been proven over and over again in studies.

Vigeland: And money managers are not immune to it.

Frick: Exactly. They're human like everyone else. And not only do they feel the pain of the loss of their own portfolios, but they have all of their customers who are heaping scorn and abuse upon them. So, you know, when you look at it from that point of view, maybe we were just too pumped up a year ago. And now we're kind of getting back to what's reality. People I think now are getting back to reality.

The thing I worry about is, in a couple years, the market's going to start edging up, there's going to be a new boom that's going to come along, and we're going to forget that these big losses can happen. And there's no reason to think that they're not going to be happening more frequently, given everything that's going on in the financial sector these days.

Vigeland: Bob Frick is a senior editor at Kiplinger's Personal Finance. Thanks so much for coming in and talking to us today.

Frick: Ah, you're so welcome.

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