The noted philosopher Charlie Brown once whined that there is no heavier burden than a great potential.
And yet investors' expectations of continued stock market increases, even after six years of a bull market and two consecutive years of extraordinary growth, may be a heavier burden than the market can meet.
"Studies on financial expectations show that investors tend to take the latest information as the basis for their expectations," said Michael Roszkowski, who studies investor psychology at American College in Bryn Mawr, Pa.
"So people who are in the market now, who have never had the experience of a down market, will always expect the market to be good, despite history, because they haven't experienced [a bad market]."
Those expectations of continued growth, plus the fact that cash flows seem to indicate that many people jumped into the stock market later than others and want to cash in on what they perceive as a never-ending bull market, worries some market watchers.
"Some of the people we have been speaking to have very high expectations," said Steve Janachowski, partner in a Tiburon, Calif., mutual fund advisory firm. "The market has been so good for so long they are moving into the greed camp.
"I think it is dangerous for the industry," he said. "We have seen some huge moves into equities in some of the 401(k) plans we have because [investors] think the returns are a sure thing."
Six years of a rising market with only dips that investors have been taught is a buying, not a selling, opportunity may have taken a toll.
"It is like people have been drinking a six-pack every year for six years, and they don't realize they are drunk, but they have an alcohol investment level well above 0.10 and their perception is skewed," said Robert Markman, who runs Markman Capital Management in Edina, Minn., which manages the Markman mutual funds.
"When you read about how belligerent some investors have become with their fund managers who aren't fully invested the way they would like, you can see it is like trying to take car keys away from a drunk," he said.
Investors also are criticizing managers because they haven't outpaced the performance of the index funds or some other investor benchmark.
But pushing your fund manager to do something the manager doesn't want to do is a fool's game. Most investors picked a mutual fund because it's an acknowledgment they have neither the time nor the expertise to pick stocks.
Presumably, they picked the fund because it invested in what they wanted to invest in. If they have suddenly become smart enough to manage their money on their own, they should sell their fund and do it, or move to another fund.
"You are hiring the managers to manage the money," said John Markese, president of the American Association of Individual Investors, "and ultimately they have to make the decision for the majority of investors, not just the few that call."
But performance is the name of the game in a bull market, and Markese said some of the belligerence might be a backlash against what happened to Fidelity Magellan investors when then-fund manager Jeff Vinik put 20 percent of an aggressive stock fund's money into bonds in a market-timing move.
"That could trigger aggressive behavior from some investors who think their fund has too much cash," Markese said.
"But they also have to understand the objective and style of the fund, that it stays reasonably well invested."
Magellan paid a price, with outflows of more than $5 billion from the world's largest mutual fund, which translates into a lot of lost fee income for Fidelity.
Yet holding a lot of cash might not be a detriment for some funds. For example, Andrew Pilara, who manages the $127 million Robertson Stephens Partners Fund, a small-company value fund, had the fund 37 percent in cash last month, and currently more than 50 percent in cash.
Yet the fund was up 43 percent for the year.
Vanguard's 500 Stock Portfolio fund, the granddaddy of the stock index funds, is always fully invested because that is the nature of the fund, and while it has outperformed most stock funds for the past two years, generating about $12 billion in new cash inflows in the process, it can be a very volatile fund, which new investors might not understand.
"The bad news about the fund is that it can go down as much as the market does," said Vanguard principal Brian Mattes.
"The good news is that it can go down as much as the market does."
Mattes said there was some concern about the "level of speculation and unrealistic expectations in the index fund."
"Vanguard is worried about the speculative expectations," he said.
"We are concerned and are preparing a notice for our shareholders telling them that two great years back to back is rarely followed by a third year."
Still, Stephen Canter, chief investment officer for Dreyfus Corp., said many new investors have become used to the high returns over the past six years.
"We and the mutual industry have made a point of telling investors these returns are at odds with long-term trends, and the educational effort has been pretty powerful," Canter said.
Pub Date: 1/19/97
