Long-term investing may be in again

January 05, 1992|By Tom Petruno | Tom Petruno,Los Angeles Times

In the history books -- or more likely, the history laser discs -- of the next century, chroniclers may remember the early 1990s for the stunning comeback of a once-endangered species: the Long-Term Investor.

The year that just ended saw individual investors abandon short-term cash "parking places" and pour money into stocks and bonds at a spectacular rate. Even Wall Street's most bullish analysts were awed by investors' persistent willingness to look beyond the economic and market turmoil of the moment.

And as 1992 opens, the rush to go long seems as intense as ever. The stock market continues to soar to new highs, and heavy demand for 30-year Treasury bonds -- the ultimate long-term investment -- has pulled the bond's yield down to a five-year low of 7.39 percent from 7.98 percent in late November.

There is, of course, no market gauge that tells why the average person buys stocks or bonds, or how long they'll be willing to hold such securities. Certainly, for many individuals the decision to buy in 1991 was more a knee-jerk reaction to falling short-term interest rates -- now at their lowest level in 27 years -- than some conscious choice to be a long-term investor.

Even so, some experts believe that Wall Street has become the beneficiary of powerful and far-reaching changes in investor psychology that will continue to bring a tidal wave of money into stocks and bonds in 1992 and beyond.

More important, that money may be more likely to remain invested despite frightening and inevitable market swings.

The implications of such a shift would be vast. The United States could slowly shed its debtor status and become a giant capital-creation machine, rivaling Japan's model in the 1980s. U.S. entrepreneurs would have access to cheap long-term money with which to start new businesses. Job growth could mushroom over time.

If it happens this way, the credit will go to an unlikely alliance of three groups of investors who may share nothing but a belief in the merits -- or at least the grudging necessity -- of being a long-term investor in the 1990s. These groups are best described as the realists, the fearful and the hopeful:

* The realists among investors believe that the United States has entered a prolonged period of, at best, slow economic growth.

The massive debt taken on by consumers, businesses and government in the 1980s amounted to "the ultimate leveraged buyout" -- the LBO of an entire nation, says Jeffrey Bronchick, portfolio manager at Campbell, Reed, Conner & Birdwell Investment Management in Los Angeles.

To the realists, the slimming-down and sobering-up period is a virtual guarantee of low U.S. demand for money and minimal consumption of goods for a long time to come. Remember, the debt buildup went on for eight years, from 1982 to 1990. Even if the unwinding takes just four years, we're only halfway there.

The good news is that the unwinding should mean continued low interest rates and low inflation -- the two best friends the bond and stock markets ever had.

Thus, the realists are pouring money into stocks of strong companies that will prosper even in a slow-growth economy, and into long-term bonds that still pay 7 percent or more (vs. short-term interest rates of 4 percent or less).

* The fearful investors who jumped into long-term securities last year don't necessarily fear the nation's ultimate ability to come out of this recession. More likely, they were afraid for their own futures, because they hadn't built up adequate wealth for the key events of later life.

So the fearful are buying stocks and bonds in a virtual frenzy now to make up for their lack of savings in the '80s, or perhaps for a lack of investment diversification outside of their homes and bank certificates of deposit. You can see this group's dollars flowing into stock and bond mutual funds in particular -- $207 billion in total purchases through November, a record annual pace -- because of the ease of investment and the funds' widespread use as retirement-account vehicles.

The fearful are typically "baby boomers," the 76 million Americans ages 27 to 45. Simple demographics guaranteed that at some point in the aging process the boomers would begin to spend less and save more.

That point appears to be now -- with retirement for the oldest boomers just 15 or so years away, their homes already filled with nearly everything they could want and their children's unfunded college education staring them in the face.

Are these folks really serious about saving money? When a late-November Gallup survey for mutual fund giant Fidelity Investments asked investors their retirement-savings plans for 1992, 37 percent said they would put more money away than in 1991, 27 percent said they would save the same amount and only 21 percent planned to save less.

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