A healthy amount of fear is a good thing, especially for investors. A carefree attitude can really cost you — look what happened to those who didn't build enough risk protection into their portfolios when stocks crashed.
We're more than a year past the market bottom of March 2009, yet there's still plenty to worry about. Stocks fell sharply in May, and markets are still unsettled.
With that in mind, the Associated Press approached two mutual fund managers attending this week's Morningstar investment conference, and a noted investment strategist. We asked what they see as the biggest risks in the market now. Here's what's on their minds:
Chuck Akre, manager, Akre Focus Fund (AKREX), worries stocks may fall on the realization that it will be years before U.S. consumers will spend freely enough to lift the economy. Consumer spending accounts for about 70 percent of the U.S. economy, so the willingness to spend again is key to fueling a sustained recovery.
Akre notes consumers are constrained on multiple fronts. Unemployment remains stubbornly high at 9.7 percent. Banks have tightened access to credit, even if interest rates are low. The housing market remains weak, and tax increases loom for many Americans, especially those in upper-income brackets.
"For the next few years, it will be nearly impossible for consumers to spend like they did through most of the last decade," Akre says.
"There's a lot going on that's causing me to be cautious," said Akre, who's holding about 30 percent of the $220 million in his fund's assets in cash.
Jim McDonald, chief investment strategist at Northern Trust Corp., a Chicago-based manager of $647 billion, worries investors have become so enamored with the relative safety of bonds that they'll miss out on any further stock gains.
Taxable bond funds have had a net $390 billion flow in over the past year and a half, while U.S. stock funds have had $45 billion pulled out. The shift to fixed-income investments means many investors have missed out on much of the nearly 65 percent gain since March 2009 in the Standard & Poor's 500 stock index.
But the pain from 2008's losses and continuing market volatility have still left investors wary of getting back in.
"It may take another couple quarters of market gains before investors can really get comfortable about returning to stocks," McDonald says.
If that scenario plays out, they may be too late.
"It's the wrong behavioral response to get in after markets have had a long run up, but history would suggest that's what is likely to happen," he says.
Kent Croft, co-manager of the Croft Value Fund (CLVFX), says there are so many risks in the market now that it's hard to single out one as the biggest. He sees more problems than usual these days: the European debt crisis, persistently high U.S. unemployment, a weak housing market, and growing government debt. Then there's the Gulf Coast oil spill, and uncertainties about the overhaul of U.S. financial regulations. The package has nearly cleared Congress, but the impact of the reforms is still unclear.
"We've had a month of bad news, and it seems to be driving the markets, even though companies are sitting there with good balance sheets in a low-interest environment," Croft says.
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