Fund investors stood firm as stocks fell Some still unaware of the unpleasantness

Mutual funds

November 29, 1998|By Jerry Morgan | Jerry Morgan,NEWSDAY

What did investors do during the baby bear market this summer? They hibernated.

All evidence seems to indicate that mutual fund investors stayed put during the recent unpleasantness in the market from July to October, when stocks and funds fell 20 percent or more.

In fact, said Dalbar President Louis Harvey: While aggressive investors stayed on the sideline, "the vast bulk of people continued to do business as usual." Dalbar, a Boston financial services research firm, is conducting focus groups with investors.

The most surprising finding "was the amazing number of people that don't know something happened," he said.

That may be because the fund industry got lucky with the timing of the decline, said Don Phillips, president of Morningstar Inc., the Chicago mutual fund ratings firm.

"The stock market had a big run-up in the early part of the year, and the 20 percent decline came in the middle, when a lot of people were on vacation, and then the market went back up," he said.

"Most people do their mental arithmetic on an annual basis and it looks like we are going to have a fourth double-digit year, which we were told couldn't happen," Phillips said.

If the decline had happened at the beginning of the year, before the run-up of prices, the story might have been different, Phillips said. But by October, "people were either ahead for the year or still ahead from when they made their investment," he added.

During August, mutual fund investors pulled less than $12 billion from stock funds, a tidy sum on the surface, but only four-tenths of 1 percent of stock mutual fund assets, according to the Investment Company Institute, the mutual fund industry trade group in Washington. While investors didn't pull money out, many just put new money into money market funds and bonds for a month or so.

The most recent study was a 10-question e-mail survey on the World Wide Web site of the Mutual Fund Educational Alliance, a nonprofit group in Kansas City, Mo., funded largely by no-load fund firms. The questionnaire was on the site Oct. 24 to Nov. 6, and 2,108 people responded.

Almost 68 percent of respondents said they made no changes in their portfolios in the past three months.

And when asked how big a drop it would take to get them out of NTC stock funds, 64 percent said they would not make any significant moves regardless of market decline.

That may sound like bravado, but other investor surveys found the same pattern: Investors pretty much remained calm and didn't make big changes to their portfolio, and they don't plan to get out of stock and stock funds, period.

A Charles Schwab and Co. survey Sept. 1 during the market decline spoke to 449 investors and 92 percent of them said the stock market was still the best place for long-term investing, 89 percent said a market correction was a good time to buy undervalued stocks and 70 percent made no changes in their portfolios.

Individual mutual fund firms found pretty much the same -- both with regular customers and those in retirement accounts such as 401(k)s. In August, for example, Fidelity Investments in Boston surveyed 400 401(k) participants and found 74 percent planned to do nothing if the market continued to fall and 10 percent said they would buy more stocks or stock funds.

Despite the seeming calm of their actions, more than 800 investors sent comments via e-mail and indicated a high level of concern at the volatility of the stock market, said Michelle Smith, managing director of the Mutual Fund Education Alliance. The MFEA survey found 65 percent of the investors were concerned about the market.

One investor e-mailed Smith: "I have not made any changes, however, I have considered it. I worry about the overreaction/feeding frenzy mentality of many investors that cause extreme volatility for no good reason. This makes it hard to make investment decisions based on logic. Bottom line: I have struggled to 'stay the course' for the long term despite my nervousness to do so."

"What was interesting," Smith said, was that investors stayed the course but yet in their e-mail there was real concern. "They were saying 'I'm scared to death' but with resignation that there really isn't any other place to go."

While that's true, she said, "it doesn't mean they have to like it."

Pub Date: 11/29/98

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