Some additional thoughts from Pierre Belec, amongst some repeated mufu bashing ->
Bush's Dividend Plan a Wet Firecracker
NEW YORK (Reuters) - Let's stop beating around the bush. President Bush's game plan to get the stock market back on its feet may not hit a home run.
Investors who have lived through the worst bear market in a generation are scared stiff about returning to Wall Street.
As investors open their mutual-fund statements for 2002 and agonize over a third straight year of losses, it'll be tough to convince them stocks will again be a great wealth builder.
Bush's proposal to remove the tax on dividends may not be the lure that will get investors to load up on stocks.
Fact is individual investors, who are responsible for two-thirds of the flows in 401(k) and IRA retirement accounts, already are getting a tax-free ride with their dividend-paying stocks. By some estimates, individual investors have parked more than $2.8 trillion in tax-deferred stocks, with another $2.3 trillion held by private and government pension funds.
At best, the dividend proposal, if it passes after some horse-trading in Congress, may give only a modest boost to the market, now in the longest bear streak since 1938-42.
Judging by the market's lukewarm response to Bush's plan, it's fair to say the smart money isn't betting the ranch that the dividend measure will pass. Worth remembering is that the Street has an uncanny ability to price in the value of policy changes.
ONCE BURNED, TWICE SHY
Indeed, the investment environment is very different. After one of the worst bear markets, the lucky mutual fund investors are around the break-even point while the unfortunate folks are underwater, says Ray DeVoe, publisher of the DeVoe Report.
The investing public has learned the painful lesson that there is no sure thing on Wall Street. And in today's risky environment, investing is a lot like playing at the craps table. Successful gamblers will tell you it's always smart to change tables after a winning streak.
Not surprisingly, bond mutual funds posted their best returns in five years last year. The average bond fund returned 4.80 percent, while the average U.S. diversified stock fund plunged 22.36 percent in 2002, fund tracker Lipper Inc. says.
The Federal Reserve reported late last year that for the first time since 1991, American households had more money in savings accounts than in the stock market.
FORTUNE COOKIES
Few people are now of the mind-set that because stocks are down so much, the odds are high for a turn to the upside. The reliability of such a contrarian view in predicting the market is as good as fortune cookies.
"I think that individual investors are becoming more sour, disillusioned and discontent with the market and will continue to exit stocks," says DeVoe, a veteran Wall Streeter.
History is full of examples of the trusting public being slow to focus on bad news after a painful bear market. Most investors don't double up on their bets for a new bull market, nor do they turn net sellers for a long time.
"But they also don't become net buyers until the stock market recovery is well advanced," DeVoe says.
In the bear market of the 1970s, for example, investors continued to make net withdrawals from stock funds every month -- except one -- from November 1971 through October 1979.
"Not until November 1981 were there two consecutive months of net inflows in mutual funds -- even though the S&P 500 index rose in five of the six years from 1975 through 1980," DeVoe says.
Investors also didn't hop back into stocks after the October 1987 meltdown. From December 1987 to December 1988, they snubbed the market and pulled money out of stock funds. Even as the market rebounded over the next seven months, fund flows remained negative.
Wall Street is now watching the behavior of investors after a mass exodus from stock funds in 2002.
"During the 1990s mania, the love affair with stocks was so strong, the disillusionment that follows could be particularly bitter and prolonged," DeVoe says.
TIRED OF HIGH FEES
People are also sick and tired of paying high fees for doing business with their fund managers.
John Bogle, founder of the ultra-cost-conscious Vanguard Group, the No. 2 U.S. mutual fund company, warned this week the industry is facing a crisis of confidence and it needs to get back to its former values or risk losing more investors.
While the Standard & Poor's 500 index chalked up annual returns of 13 percent on average over the last two decades, the average return on mutual funds lagged at 10 percent, and fund investors earned a measly 2 percent a year due to the industry's push for high management fees.
"Fund investors won't act contrary to their own economic interest for ever," Bogle, a long-time industry critic, said.
One possibility is that frustrated investors may take advantage of any rallies to get out of the market, thus giving new meaning to the saying, "getting even."
Three years into the bear market, people are rethinking the wisdom of the stock salesmen's pitch: Buy and hold.
The Street's "can't-lose" strategy has been a miserable failure since March 2000. Sadly, people are finding out the market can be bad for a long time and it's not wise to be in stocks all of the time.
The average mutual fund is down 50 percent or more, proving that risk is not always worth taking.
"The buy-and-hold for the longer term strategy has been discredited and probably will not work in the type of choppy market I expect over the foreseeable future," DeVoe says. "Stock selection, as in previous flat markets, will be imperative."
(Pierre Belec is a free-lance writer. Any opinions expressed are those of Mr. Belec.) |
