6 Ways to Bring Small Investors Back To the Stock Market
Wed, Aug 25, 6:25 AM ET, by eDividendStocks.com
Jim Cramer acknowledged that the stock market is "as troubled as I have ever seen it in my 31 years investing career" on yesterday's Mad Money show. The key problem is spelled out in The New York Times featured article “In Striking Shift, Small Investors Flee Stock Market.” The article states that small investors have pulled $33 billion out of the stock market this year, while pumping $185 billion into bond funds. This is a disturbing trend, especially when you consider how little treasuries are yielding these days. Investors are being lulled into a false sense of security. The meager returns earned on these fixed income investments are going to be absorbed by inflation. Even in a zero-inflation environment, earning less than 1% return on your portfolio is hardly going to fund your retirement or pay for your children's college education. It's incredible that investors are opting for fixed income funds, when high yield dividend stocks are on sale. Even safer blue chip stocks like AT&T or Verizon offer investors significantly more attractive risk-reward tradeoffs. Cramer is surprised that stock exchanges are not taking actions to ease investor concerns. Here are 6 ways to bring small investors back to the stock market. 1. Flash Crash Investigation It's unfathomable that 3 ½ months after the fact, we still have no clear idea as to what caused the infamous "flash crash" on May 6th. That single event completed shook the confidence of the small investor. Watching the shares of ultra-blue chip Procter & Gamble (PG: 59.66 0.00%) fall 35% in less than four minutes can have a lasting effect. We need a definitive report on the causes of the May flash crash and procedures implemented to insure that it won't happen again. 2. Reduce Capital Gains Taxes It's unfortunate that the government seems convinced that capital gains taxes need to increase. Few understand the impact that the new dividend tax could have on individual investors. The government needs to give small investors an incentive to invest in the stock market, rather than punishing them for doing so. Jim Cramer suggested reducing the tax rate to 10% on dividend income and capital gains. 3. Self-directed 401(k)s Too many investors view the stock market as this mysterious monster that disintegrates their portfolio. These investors often are limited to only a handful of mutual fund options in their 401k programs. These funds tend to deliver below average returns while charging their clients hefty fees. Small investors should have the option to self-direct their 401k in order to build a portfolio of high quality dividend stocks. 4. SEC Ramp-up The Securities & Exchange Commission (SEC) has done a dismal job of protecting investors from the escalating levels of white collar crime. The SEC failed to protect investors in Enron, Worldcom, Bear Stearns, etc. Then there is the proliferation of ponzi schemes led by $50 billion Bernie Madoff scheme. Cramer believes that the SEC needs 50,000 employees to police these rising levels of white collar crime. 5. Exchange Circuit Breakers Investors need to have confidence that if the markets go haywire, they won't watch their Accenture (ACN: 37.19 0.00%) stock drop to $.06 per share like they saw on May 6th. The stock exchanges need to have proper circuit breakers in place that can be engaged at a second's notice. 6. GM IPO Since it was Joe Taxpayer that had to foot the bill to bailout General Motors (GM: 0.75 0.00%), Jim Cramer thinks it only fair that those investors should be able to participate in GM's IPO. Bankers and hedge funds shouldn't be able to make fat profits from this IPO, while small investors are forced to sit on the sideline. GM needs to get as many small investors as possible involved and they should price their IPO so that it is guaranteed to get a pop on their first day of trading. Implementing these six items could go a long way towards bringing the small investor back to the stock market. Recommend This Article To Others:
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