Facebook hurting confidence

Investors had pulled more than $9.1 billion out of equity mutual funds in May even before the Facebook IPO face-plant, and that financial train wreck will certainly not help restore individual investor confidence in the equity markets.

The massive technological fumble by Nasdaq no doubt saved some investors, particularly individual investors, from losses on Facebook stock as their trades were not executed. But the subsequent plunge in the company's stock price — and reports that some institutions received a negative analyst's report from underwriter Morgan Stanley (MS) — will further convince people that the stock investing game is rigged in favor of the institutions.

Coming so soon after the flash crash of May 6, 2010, and the market meltdown of 2008-2009, the Facebook flub could be the last straw for many individual investors tempted to flee to bonds or even money market funds.

This would be unfortunate for investors trying to save for retirement through 401(k) and other defined contribution plans. The yields on bonds are so low that accumulating a decent retirement fund is nearly impossible, and they most likely will suffer losses when bond yields rise, as they eventually must.

Likewise, money market fund yields are too low to be a sensible long-term investment for those saving for retirement.

Some plan participants might even be tempted to stop contributing to their defined contribution plans when they see the balances declining because of market losses.

The retirement industry must attempt to educate 401(k) plan participants, and those in other defined contribution plans, that in the long run significant allocations to diversified equity portfolios are their best hope of accumulating decent pools of savings to provide retirement income.

They must address investors' concerns and point out that in the long run, stock market returns grow with the economy, and that when the U.S. and world economies recover from the current malaise, so too will stock returns.