Skip to: Content
Skip to: Site Navigation
Skip to: Search


Cover Story

Dow at 15,000: What the stock market is telling us

As Wall Street posts a new record, experts decode its message about the state of the economy – and whether it's too late to invest.

(Page 3 of 4)



One example is Ameritrade itself. Three years ago, some 9 percent of its retail investors' trades were derivatives, usually options. Now, derivatives make up almost 40 percent of their trades. "We have close to 80,000 people last year who traded their very first option with us," Mr. Quirk says.

Skip to next paragraph

Options allow shareholders to buy some price protection in big downturns. For example, those who bought Apple at $450 might buy the option (or right) to sell the stock at $375, thus limiting their losses to $75 a share if the stock plunges.

But options can also be used to boost returns when a stock is moving sideways. The Apple shareholder who bought at $450 and who likes the company's long-term prospects can sell the option to someone else to buy the stock at $525. That limits the investor's gains to $75 a share if the stock jumps, but that person can still make money if the stock price stays flat. This is the strategy that many Ameritrade customers are using.

Ameritrade's investor movement index, a relatively new behavioral measure of its 6 million individual investors, finds that they are carefully moving to take on more risk and have become far more bullish over the past nine months.

Some investors have no plans to get back into stocks, either because they believe they've missed the rally or don't believe it's real. "It would have been nice to have caught the market's rally," says Brian Hodgeman, an insurance agent from Cleves, Ohio, who largely exited the market in 2008. "But there's too much risk in the market, and I don't feel too badly that I didn't" jump back in. The collapse that occurred "in 2008 could happen again."

Other investors have reentered the market, like Richard Groen, who describes himself as "personally cautious." In mid-2008, the retired high school English teacher from Livonia, Mich., sold off more than half of his individual stock holdings. Once the market bottomed and rebounded by about 10 percent, he began reinvesting slowly. At first, he spread it across many stocks and funds. Then, about a year and a half ago, he started putting a special focus on real estate investment trusts. Soon, he plans to sell some of his riskier holdings, take his profits, and rebalance his portfolio "to make it safer."

In a way, the Federal Reserve is forcing Americans into stocks. With interest rates essentially at zero, Americans can't earn enough money from certificates of deposit to keep up with inflation. Bond prices, which move in the opposite direction of interest rates, have nowhere to go but down once the Fed allows interest rates to rise. That Fed support is proving to be a double-edged sword.

On the one hand, it's helping to calm fears that stocks will collapse. Retired investor Climie, for one, expects to "remain bullish as long as the Fed continues to flood the market with money." On the other hand, the Fed's involvement may be artificially boosting equities. Each time the central bank has signaled that it was ending its special intervention to lower interest rates, the market has plummeted, points out Mr. Polcari of O'Neil Securities. What happens when the Fed pulls out for good?

The different approaches investors take varies, to a large extent, by generation. When Heather Adams, a 20-something, was laid off from her job at a vocational-training college in Boston two years ago, she didn't panic – and she didn't give up on stocks. When she found a high school teaching job in Pasco County, Fla., she was able to convert her 401(k) retirement plan into a 403(b), the public sector equivalent, without penalty. She now has three retirement accounts: In addition to her 403(b), there's her own private Roth individual retirement account and a government pension plan that she's eligible for after her eighth year of teaching (she's now in her second). Like many Millennials, she has plenty of time to ride out future bear markets before she retires.

Permissions

  • Weekly review of global news and ideas
  • Balanced, insightful and trustworthy
  • Subscribe in print or digital

Special Offer

 

Doing Good

 

What happens when ordinary people decide to pay it forward? Extraordinary change...

Endeavor Global, cofounded by Linda Rottenberg (here at the nonprofit’s headquarters in New York), helps entrepreneurs in emerging markets.

Linda Rottenberg helps people pursue dreams – and create thousands of jobs

She's chief executive of Endeavor Global, a nonprofit group that gives a leg up to budding entrepreneurs.

 
 
Become a fan! Follow us! Google+ YouTube See our feeds!