Holders of 401(k) Plans Bet More on Stocks
Sig:
Here is a clue as to why the U.S markets keep going and going and going...so the story we keep hearing about the 401k biz seems to be true. The important thing here to note here is that investors keep pouring money into the market even when the market goes down.If I remember correctly even during the crash of 87 the small investors did not panic (I know I didn't),who really panicked then was the pundits on Wall Street and the trend continues.Here is one for the little guys,screw the pundits.
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Americans continue to pour their retirement money into stocks, buoying the U.S. equity market.
About $7,570 of every $10,000 of savings in 401(k) retirement plans is going to stocks, including a hefty amount to equity-oriented mutual funds, according to Spectrem Group, a fund industry research firm. That compares with 1996 when 73.1 percent of all 401(k) money was invested in stocks and 1994 when 64.4 percent was invested in stocks.
''I've got all my 401(k) money in equity-based mutual funds,'' said Ralph Buckley, a 36-year-old manufacturing engineer in Gloucester, Massachusetts.
The flood of capital also helps explain why many analysts remain optimistic about the market's long-term prospects even though the Standard & Poor's 500 Index gained at a seemingly unsustainable annual clip of 31 percent since the end of 1994.
''There's no question 401(k) flows have been boosting the stock market, in conjunction with massive stock repurchase programs by companies and the high level of corporate mergers and acquisitions activity,'' said Peter Canelo, the U.S. investment strategist at Morgan Stanley Dean Witter & Co.
Statistics from San Francisco-based Spectrem show that most investors with 401(k) plans have been steering money to stocks in recent years from low-risk money market funds and guaranteed investment contracts (GICs).
Ballooning Assets
The level of investment in money markets and GICs fell to 9.3 percent from 17.8 percent four years ago, according to Spectrem, which tracks 401(k) investing trends every two years.
The remainder of 401(k) assets are invested in ''balanced'' funds, which own a mix of stocks and bonds, and bond funds, according to Spectrem.
A 401(k) plan is a tax-deferred retirement plan that doesn't guarantee a fixed payment upon retirement like a traditional pension plan but depends on the future value of the investments people choose.
The assets of 401(k) retirement plans exceed $1 trillion, up from $985 billion in 1997, $810 billion in 1996 and $300 billion in 1990, Spectrem said.
Growth of the 401(k) business has been spurred by the surging equities market and the increasing popularity of these plans among companies that sponsor them.
About 267,000 companies in the U.S. offered 401(k) plans to employees at the start of 1998, up from about 153,000 companies at the end of 1990, according to Spectrem.
About 42 percent of America's 401(k) assets are invested in plans managed by mutual fund companies. That's double -- on a percentage basis -- what these companies oversaw in 1990, Spectrem said.
Fidelity Investments and Vanguard Group, the two biggest U.S. fund companies, have been the most successful in terms of attracting money from retirement plans.
Holders of 40l(k)s also can put money in equities if their company's publicly traded stock is included as an investment option, or if the plan has a self-directed brokerage option, according to Spectrem.
Looking Down the Road
In the days ahead, 40l(k) investors may be burned by the stock market, Morgan Stanley Dean Witter's Canelo warned. ''Stocks are moderately overpriced'' after last year's gains, he said.
The average stock in the S&P 500 trades at 24 times 1999 earnings estimates, according to researchers at First Call Corp. That compares with a price-to-earnings multiple on this basis of closer to 14 in 1994.
''This year's price-to-earnings multiple is the highest we've seen since we starting tracking this information in 1968,'' said Tony Crooks, an analyst at First Call in Boston.
Couple those concerns with a possible recession in Brazil, the world's ninth-biggest economy, and some investors come to the conclusion that U.S. stocks may not continue to rise at the pace they have.
Erik Bruun, 37, an analyst at a private investment firm in Great Barrington, Massachusetts, changed his 401(k) allocation in September, redirecting all his money to a bond fund from a group of stock funds.
''I prefer to keep what I have rather than risk losing a chunk of it at a time when the market seems overvalued,'' Bruun said. ''Time will tell whether I've made the right decision.''
One thing that has kept the stock market climbing is that 401(k) investors have tended to stick with stocks even when prices fall.
''There is a small group of investors who make short-term shifts in their 401(k) plans to adjust to market volatility, but any shifts are temporary,'' said Dennis Dolego, director of research at Optima Group, a financial marketing and distribution firm in Fairfield, Connecticut. ''The vast majority of investors, however, ignore gyrations in the financial markets.''
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