Investors are likely getting more volatility than they bargained for this late in the year.
With the stock market continuing its downward slide, individual investors may be tempted to sell stocks and sit with their cash on the sidelines until the carnage ends.
Paul West, the managing partner at wealth management firm Carson Group in Omaha, Nebraska, said investors are beginning to question the mix of stocks, bonds and other investments they hold. That's because it's been so long since they've experienced such a sharp decline.
"They haven't felt a sustained headwind for this period of time," he told CNBC on Thursday.
The American Association of Individual Investors found that investor cash allocations reached a nearly three-year high in November, at 19.6 percent. The last time cash was that high was February 2016. Aside from dismal market performance, investors are also being influenced by political uncertainty in Washington, trade tensions and the outlook for economic growth. The allocation to stocks was down 4.9 percentage points, to 64.6 percent.
After the latest rout on Thursday, the S&P 500 was now off 16 percent from its record high in September and now down 7 percent for the year.
According to a monthly activity report last week, clients of brokerage giant Charles Schwab & Co. slowly moved more money to cash in October and November, about 11 percent of their assets at the firm, compared with the range of 10 to 10.9 percent in cash in prior months.
On the wealthier end of the spectrum, members of the millionaire investor network Tiger 21 also had about 10 percent of their money in cash as of the end of the third quarter. Their biggest holding is real estate, at 28 percent, and in stakes of privately held companies, at 24 percent.
Michael Sonnenfeldt, the founder of Tiger 21, told CNBC recently that there are fewer people taking speculative risks. "Given all the risk in the world, people are pulling back," he said last month. And Ian Burnstein, a Detroit entrepreneur who leads that city's Tiger 21 club, said last month that members are talking about weathering a slowdown. "Everyone has asked: Am I diversified enough? Am I prepared?"
On Thursday, the Dow Jones Industrial Average swooned for the second straight day after the Federal Reserve raised interest rates another quarter point, its fourth rate increase this year. Investors have been spooked by the prospect of a slowing economy, even though many experts say conditions are still good.
The Dow dropped more than 600 points at one point, and dipped to its lowest point of the year. The technology-heavy Nasdaq dipped into a bear market, and companies in the S&P 500 index have lost a total of $2.39 trillion in market value in the month of December.
The Investment Company Institute said Wednesday that a net $34.8 billion flowed out of long-term mutual funds during the week ended Dec. 12. That is up from $4.4 billion that was pulled out the prior week and $13.3 billion pulled out the last week of November.
But ICI chief economist Sean Collins said, "Consistent with their behavior over seven decades of history, mutual fund investors are reacting moderately to market volatility, and for the most part are maintaining their investment plans and asset allocations."
That is what advisors are telling clients to do. "Our advice is to stay the course," West told CNBC. "An investor may guess right when to get in/out of the market through a move to cash. However, what we see is that they spend so much time worrying about when to get back in/out that stress and anxiety increases significantly."
A prolonged downturn may be more of a concern to those on the cusp of retirement, when savings are converted slowly to income to cover living expenses. Total U.S. retirement assets were $29.2 trillion as of the end of September, according to the ICI, up 2.8 percent from the end of June. Some $9.5 trillion of that was in Individual Retirement Accounts, with $2.6 trillion invested in stocks.
Pessimism actually increased in the American Association of Individual Investors' most recent sentiment survey, which measured the week ending Wednesday. About 24.9 percent of investors said they believed stock prices would rise over the next six months. That's up 4 percentage points from the prior week.
To be sure, optimism has been running below the historical average for 13 straight weeks, and readings below 28 percent imply an unusually low level of optimism.
Before the latest bout of stock market volatility and downward momentum, the number of 401(k) millionaires had grown 40 percent in the year ending in September and women investors had reached record contribution rates, according to a quarterly survey by Fidelity Investments. The average 401(k) balance in the third quarter reached an all-time high of $106,500, Fidelity said. The previous record was set in the fourth quarter 2017.