Investors shifting money around since Sept. 11 attack
BY MARK SCHWANHAUSSER
Mercury News
In the first week of stock market trading after the suicide hijackings, millions of investors focused on some nerve-racking numbers. Dow: down xx percent. Nasdaq: down xx percent. The S&P 500: down xx percent.
But here's the number that made me most nervous last week: 0.58 percent.
That number shows the record change in the little-known Hewitt 401(k) Index on Monday, the first day of trading after the Sept. 11 attacks. Hewitt manages $71 billion, and the index measures the percentage of money that investors shifted around that day.
In dollar terms, that amount represented about $400 million -- almost all of it fleeing from stocks. In statistical terms, that change in the index was 2 1/2 times the previous record and more than nine times a normal day's activity.
But in psychological terms, the transfers might represent something far more ominous. They could be evidence that 401(k) investors are acting with their hearts and feet, not their brains.
I hope you're not one of them.
It's possible this number can be shrugged off. For starters, there might have been a lot of pent-up demand while the markets were shut down four days. If so, maybe we can accept the longstanding conventional wisdom that 401(k) investors are well-educated, well-informed and are resolved to take a long-term view when investing their retirement stash.
I'm not so sure, though.
That widely held conviction was developed during a bull market that rewarded investors with double-digit returns. As the legal boilerplate says, past results do not guarantee future performance.
My concern starts with the observation that investors are inherently emotional creatures. I know our brains have two sides, a ``left brain'' and a ``right brain.'' I've never accepted that the rational side of an investor's brain would control the 401(k), while the emotional side of the brain would rule other investments.
In the skeptical side of my brain, here's why I'm anxious about the implications of Monday's reading of the Hewitt index:
The index's previous records tend to coincide with days when the markets were volatile. Three months after Hewitt began compiling the index, it set a record on Oct. 28, 1997, when the Dow skidded 7 percent and market ``circuit-breakers'' temporarily halted trading. That record fell Aug. 31, 1998, when the Nasdaq plunged 8.6 percent.
Hewitt's investors are losing their bullishness. Most days this year, they have shifted money out of stocks and into bonds -- a reversal of the trend in 2000. In August, investors steered 85 percent of their transfers into conservative bonds and guaranteed investment contracts, which are akin to investing in CDs. Unless you have no fear of inflation or need the money soon, they make little sense.
Stocks accounted for only 61.5 percent of the Hewitt portfolio on Monday -- a record low. Just six trading days earlier, stocks accounted for 68.5 percent of the pot.
Can we chalk these up to coincidence? I hope so.
Here's what I do know. Many aspects of our lives were shaken on Sept. 11. One of them was our confidence in the economy and stocks.
One new teacher told me she was thinking of investing her 403(b) in a safe money-market fund until the economy warms up again. Another friend was debating with her husband whether to cut off the flow of money to her 401(k), which has lost money lately.
Neither action is wise. For one thing, both are young and have time on their side to ride through these hard times. Second, cutting off the flow of money to a 401(k) can disrupt a savings habit that many Americans can't maintain without the regular, unconscious deductions from their paychecks.
As long as you have built a smartly diversified portfolio that suits your inclination to take investment risks, these tumultuous days aren't the time to change course. Hang tight.
--------------------------------------------------------------------------------
The Money Manual appears every other Sunday, or online at www.siliconvalley.com/opinion/money. Contact me at mschwanhausser@sjmercury.com or (408) 920-5543. |
