Investors Stay Cool As Stocks Turn Cold
It's the dog that didn't bark.
As the bear market has unfolded, experts have derided individual investors for their foolishness and predicted an onslaught of panic selling. Yet there's scant evidence that investors have been unwise or unnerved.
"There's this folklore that small investors panic and pull their money out, that they buy at the top and sell at the bottom," says John Markese, president of the American Association of Individual Investors in Chicago. "But I don't see a lot of investors panicking and selling."
To be sure, some folks have been cleaned out, thanks to a lethal combination of too much margin debt and too many technology stocks. But the numbers suggest that most individuals aren't selling and that their losses are modest compared with the Nasdaq Composite Index's 60% plunge.
Consider stock mutual funds. During earlier bear markets, investors were quick to bail. In the market-crash month of October 1987, stock-fund outflows equaled 3% of stock-fund assets, according to the Investment Company Institute, the fund industry's Washington-based trade group. Three years later, in August 1990, stock-fund outflows amounted to 1% of assets, as investors headed for the sidelines following Iraq's invasion of Kuwait.
By contrast, fund investors have faced the current decline with remarkable equanimity. It wasn't until February, 11 months after stock prices started tumbling, that queasy investors pulled more money out of stock funds than they put in. And even then, February's outflow was equal to less than 0.1% of stock-fund assets.
Maybe small investors have learned something over the years. Indeed, maybe they are a little savvier than the money managers they hire. At the market's peak in March 2000, stock-fund managers had just 4% of their portfolios in cash, the lowest level in 28 years.
Since then, stock-fund managers have sounded the retreat, bolstering their cash holdings by $40 billion, so that they had 5.9% of their portfolios in cash at the end of February. Meanwhile, over the same stretch, investors added $191 billion to their stock-fund holdings, pursuing the sensible strategy of buying more shares as prices tumbled.
If the bear market drags on, that cool-headed buying could turn to frenzied selling. But I suspect the real danger will come when stocks rebound. As investors recoup their losses, they may bail out, rather than risk losing money again.
How much have ordinary investors lost in the market decline? Nobody knows for sure, partly because it's tough to get a handle on investors' holdings of individual stocks. Mr. Markese suspects that "if you looked at individual investors' holdings, they would look more like the broader Wilshire 5000 than a technology-sector fund."
We can get a good sense for how investors' stock-fund holdings have fared. According to Chicago researchers Morningstar Inc., U.S. stock funds lost an average 16.9% over the 12 months through March 31, compared with a 24.7% drubbing for the Wilshire 5000 index of most regularly traded U.S. stocks.
But if you are interested in how badly investors have been hurt, that average decline is misleading, because it gives equal weight to all funds, no matter what their size. Instead, what really counts is how the largest stock funds performed, because that is where many folks have their money invested.
With that in mind, I asked Morningstar to calculate the return for the 50 largest U.S. stock funds, based on fund assets as of the March 2000 market top. The result isn't pretty, but it is exactly what you would expect.
During the past year, these 50 giant funds, which account for 45.3% of U.S. stock-fund assets, lost an average 27.4%, compared with the Wilshire 5000's 24.7% decline. In other words, fund investors pretty much matched the market before costs, and lost somewhat more once investment costs are figured in.
"Early last year, money was flowing into tech-heavy growth funds," notes Russel Kinnel, Morningstar's director of fund analysis. "But there was already a lot of money allocated to value funds, so investors had pretty well-diversified portfolios."
Maybe we shouldn't be surprised that investors have hung tough and that their losses are in line with the market average. The fact is, the image of the tech-crazed, Internet-addicted, IPO-flipping, day-trading small investor never quite matched reality.
Look at the statistics. As of March 31, 2000, margin loans outstanding represented a modest 2.3% of total client assets at Charles Schwab Corp., the big San Francisco discount broker. As of the same date, assets of technology-sector funds accounted for just 4.2% of total stock-fund assets, according to Morningstar.
What about all those day traders? True, a lot of ordinary investors bought and sold stocks with reckless abandon as the bull market approached its dizzying peak. But very few were trading for a living. Bill Lauderback, a spokesman for the Electronic Traders Association and a vice president at Momentum Securities in Houston, puts the number of professional day traders at 10,000, unchanged from a year ago.
"Day trading appeared to be pervasive, from all the stories that were written," Mr. Markese says. "But in fact, it was just a small cadre of investors."
Write to Jonathan Clements at jonathan.clements@wsj.com |
