Investor confidence shaky, report finds

Your Funds

Your Money

September 26, 2004|By CHARLES JAFFE

GOLF LEGEND Jack Nicklaus once said that confidence was the single most important factor in winning at his sport and that no matter how great a duffer's natural talent, the only way to "obtain and sustain confidence" was through work.

In that regard, fund investors are not much different from the average Sunday hacker.

Confidence is crucial to taking a shot at your financial targets and achieving your goals.

But couple the bear market with the improper-trading scandals among mutual funds and you have a recipe for losing confidence, and a new study by Dalbar Inc. has found that investors have been shaken to the point that many of them can't take their shot.

For all investors, the new data on investor behavior stands as a reminder to check their own behavior, if only to bolster their confidence.

According to Dalbar, a Boston research firm, 20 percent of fund investors surveyed say they suffered losses directly caused by the improper actions of their managers. About 13 percent of investors said they will put less money into funds, the same percentage of respondents who have altered their portfolios since the industry's woes surfaced.

A Dalbar study after the market's enormous losses of 2000 and 2001 found that 57 percent of investors thought they had lost money and that 8 percent planned to change how they invested.

"The fundamental basis for investing is confidence," says Lou Harvey, Dalbar's president, "and this has shaken people's confidence more than anything. Even if they were not directly impacted by this, they feel like they were."

Most studies of the improper-trading activities that are at the heart of the scandals find that investor losses stemming directly from the improper actions are minuscule, particularly compared with the pain caused by the bear market.

But market losses weren't the direct result of management malfeasance, and the scandal is. That's why the blow to confidence has been so big.

Uncertainty shreds confidence, and investors have been busier looking for headlines about their funds than they have been working to "obtain and sustain" confidence in the issues they hold now.

The Dalbar confidence survey reminds investors that they need to work in order to be confident about their holdings. That work can start with these questions:

Am I confident in this fund?

This is a question you should ask yourself about each of your individual issues. Start with the fund company and manager, but move down through how the fund has performed for you in the past, what kind of grades it gets from the major research firms and more.

If you are a long-term investor, you want the kind of funds that harken to the before-scandal levels of confidence, the ones where people took a loss but didn't wig out about what it meant for their prospects.

If I have worries about the fund, are those concerns about the company, the market or me?

There might be more than one reason to worry about your fund, but the root of those fears is crucial to deciding your next move.

If you have decided that the fund company is the problem - if you can't be comfortable because of the direct actions of the fund company - change may be the best option. Those management actions could be the scandal, but more likely have to do with applying the investment strategy in a way that delivers the expected results.

If the market is the problem - you are worried about interest rates or inflation or the economic cycle - that is less a reason to ditch a fund than to check your asset allocation and see how you might invest in a fashion that makes you comfortable.

While you might lose confidence in a fund because of market conditions, changing a fund for these reasons borders on market timing. Make sure you are not just looking to change into what's hot.

If the point of concern is you - you bought a fund thinking you could stomach the risk, but are now worried that you can't - there may be a need to make a change, but again, guard against going only for funds that give you confidence right now, as those current winners aren't likely to hold up.

What other investments give me confidence?

Look outside your portfolio to find funds where management and investment style are different from what you own today. Or consider other investments, from individual stocks and bonds to exchange-traded funds, real estate and more.

"It will be difficult for funds to earn back people's confidence," Harvey says. Good performance will help, but if someone no longer believes in their fund company today, there is not a lot that will make their opinion turn around in the future. They may need to move to a company they still have confidence in."

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