Dollar-cost averaging recommended now Mutual funds


The climb was exhilarating, the view spectacular, but with the Dow Jones industrial average bouncing around above 5,600, the air is getting mighty thin. But there has been no lack of oxygen apparent in the behavior of mutual fund investors, who have been pouring record amounts of cash into the stock market.

In January alone, investors plowed an estimated $24.5 billion into stock mutual funds, a figure that eclipsed the next heaviest stock-investment month on record by more than 33 percent, according to the Investment Company Institute, the mutual fund trade group.

The rush into mutual funds comes on the heels of a spectacular 1995, in which broad market indexes rose more than 37 percent. But it has made a few market-watchers nervous, since it could represent a phenomenon that has often signaled the end of major bull markets in the past.

The Vanguard Group, the nation's second-largest mutual fund company, took in more than $4 billion from investors in January, by far the heaviest one-month total in the company's 20-year history, spokesman Brian Mattes said.

"Judging from the call volume there are a large number of novices and others who are adding to their equity positions," Mr. Mattes said. "Unfortunately, we saw a somewhat similar pattern in '87" before the market's spectacular plunge during October of that year.

It's the specter of large numbers of novice investors looking for TC quick killing that helps keep alive an old Wall Street nightmare. In it, the managers of multibillion-dollar mutual funds become the prisoners of their least-savvy customers. As those people flood the market with cash, pressure grows on fund managers to buy even overpriced stocks.

That's already happening to some extent, according to Eugene Peroni, a market analyst for Janney Montgomery Scott in Philadelphia. Mr. Peroni said many portfolio managers are pushing mutual fund money into stocks to try to keep up with the broad market averages, rather than maintaining cushions of cash that could soften a sudden downturn.

A sudden market shock, according to the nightmare scenario, could send jittery mutual fund owners rushing out as fast as they rushed in. By redeeming shares in large numbers, investors could force fund managers to sell, pushing prices down even further. There would be a cascade effect, with falling prices motivating further fund redemptions, which forces more selling, and so on in a downward spiral.

Before you worry yourself sick, however, you should know that neither Mr. Peroni nor the ICI believe the chances of such a plunge are very great.

"The same concerns were voiced well over 1,000 points ago," Mr. Peroni said. "I don't see funds being taken out of the market anytime soon."

Moreover, the ICI's latest study of mutual fund shareholder behavior over the decades concludes that most such shareholders are "experienced investors with a long-term orientation" who haven't panicked in past market downturns. What has tended to happen, rather, is new purchases of mutual funds may taper off, and investors may even redeem shares, but at a slow enough pace to avoid the "cascade of selling" effect.

The ICI study recognizes that nothing is guaranteed and that some investors do take on more risk than is good for them. "It may well be that the critical test of shareholder stability has yet to occur," the study noted.

And no less a mutual fund sage than John Bogle, the Vanguard Group chairman, said that the recent flood of cash has given him plenty of pause.

Characteristically, Vanguard has been stepping up its warnings to investors not to think short term. "A year like 1995 may already have provided a sizable chunk of the returns that can reasonably expected over the next several years," the company said in a recent bulletin.

It has also limited the frequency with which holders of some funds can redeem their shares, and attached fees to discourage others from making quick in-and-out investments.

"We're doing everything we can, but the money keeps flowing in," Mr. Bogle said.

So, what's an investor to do?

First, don't get nervous. That applies whether you're currently in or out of the market, according to Mr. Bogle.

If you're looking to invest but afraid the market may fall -- and just as afraid it might rise without you -- you can get in through a time-tested technique called "dollar-cost averaging." That simply means investing a fixed amount at regular intervals. Whether the market is falling or rising, your ultimate cost will be spread out, limiting the risk of coming in just before a big dive.

"My own experience says it's best to start and not worry about the market," Mr. Bogle said. He would spread a new investment out over the next two years, putting in an eighth each quarter. "To barrel into the market right now would be a big mistake," he said.

However, Mr. Bogle added, "If you've been in, stay in." The end of the bull market may be coming, but "we can't predict when it will come, how steep or how quickly it will come. Nobody can predict whether it will come at all."

"It's all right to say the market's too high," Mr. Bogle said. "But it could get higher for another two years."

Pub Date: 3/10/96

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