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Time to Worry: Investors Are Confident Again

New data shows that individual investors dove into the market when volatility spiked in December

At the end of last year, oil and the Russian ruble crashed, the VIX volatility index doubled, and U.S. stocks dropped 5 percent from their high — all circumstances that normally shake an investor's confidence. Not this time, though: New data from Fidelity shows that while the world panicked, many individual investors in the U.S. were buying stocks. 

On one hand, this is good news: Buying during a pullback is generally a good strategy in a rising market. On the other hand, it's pretty unusual for individual investors to do what they're supposed to. Those kinds of good habits don't usually kick in until the market's climb has nearly run its course—which suggests that the good times may be drawing to an end. Doug Ramsey, chief investment officer of Leuthold Group, said in a recent note that investors don't usually retrain themselves to “buy the dips” until late in a bull market, and that's what's happening now: “Retail investors [are] finally shaking off the worry that gripped them.”

An analysis of Fidelity’s 15 million retail brokerage customers shows that, in the tumultuous first two weeks of December, customers put in 34 percent more “buy” orders than “sell” orders for stocks and exchange-traded funds. Their buying in the first half of December was 9 percentage points higher than in November and 20 percentage points higher than in the rest of December, when markets were far calmer. They bought by about the same margin in October, the most volatile month of the year for U.S. stocks. In both cases, jumping into the markets probably paid off. By Dec. 29, the S&P 500-stock index was back to its all-time high. 

Individual investors were especially bold in the kinds of stocks they bought. From Nov. 21 to Dec. 15, the S&P 500 Energy Sector plunged 16 percent to a two-year low. But Fidelity customers put 38 percent of their net new money into energy stocks in December. That was second only to the 40 percent pulled in by health care, their favorite sector through all of 2014. 

Hunting for values in market downturns can be a smart strategy. “If there’s a pullback, they find opportunities,” Ram Subramaniam, president of Fidelity’s brokerage unit, says. Investors’ mood is “positive but not exuberant,” he says. On the other hand, these investors are helping to prop up a market that’s been rising steadily for almost six years. A legitimate worry remains: How many more times can stocks bounce back before the bull market ends?

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