The Age of Safety

This was part of the title of today’s USA Today article in the business section.  Basically, the article points out to an apparent shift in the risk aversion behavior of investors: namely, fear and not greed is now the main emotion driving investment decisions.  Indeed, a record amount – $9.43 trillion – now sits in money market funds, getting a very safe return of 0%.  Investors keep taking the money out of stock funds and moving it into perceived safety of bond funds and savings accounts.  The percentage of assets invested in financial markets dropped from 76% in 2007 to just 44% today.  All that is not too surprising, giving the fact that the stock market experienced two nearly 50% drops in the last decade.

So, is this the “new normal”?  Has the lost decade permanently changed investor psychology to seek safer havens?  I think that this will be the case for the next several months or even years  — indeed, there are many immediate threats to global economy and to financial markets.  European debt crisis has not been resolved.  Chinese economy is decelerating.  Here at home, there is a danger of “fiscal cliff”.  Longer term, however, it is a safe bet that risk-taking will return.  Such widespread caution and pessimism, as well as news articles like this typically signal market bottoms.  Sooner or later, all those investors on the sidelines now will get frustrated with zero returns, and will move back into the rising market.  But by that time, most of the gains will probably have been made.