Market Watch : Era of Individual Investor
If the Dow Jones industrial index can top that magical 3,000 mark this week, Wall Street is going to be buzzing with much more talk about a new era of investing in the 1990s. At 2,980.20 on Friday, it won’t take much to get there.
Amid all the excitement, however, is a nagging concern: Where is the individual investor in this “new era”?
Despite the stock market’s gains this year, Southern California brokers will tell you that they still have a very tough time getting current clients to buy individual stocks. And new clients aren’t exactly knocking down brokers’ doors to join the party. It’s still a rarity for an individual to call a brokerage, unsolicited, and ask to open a stock account.
Even the discount brokerages, which cater specifically to the individual who wants to pick his or her own stocks, admit that business hasn’t picked up much, even as the Dow has staged a dramatic surge from 2,550 in late February.
“The pace at which we’re opening accounts is about the same as in 1989,” says Charles Schwab, head of discount brokerage Charles Schwab & Co., the nation’s largest. Yet he also admits that “about 25% of the people who might have been active in 1987 are dormant now.”
In fact, of $27 billion in Schwab customer assets, $9 billion--fully 33%--is in money market funds and other cash assets, Charles Schwab says. That’s a record for cash.
This isn’t to say individual investors have forsaken the stock market. Far from it. What they’re buying now are stock mutual funds. Since the start of the year, purchases of stock funds have shocked the fund industry. In May alone, investors bought $6 billion in stock fund shares, up 58% from May, 1989, purchases of $3.8 billion.
The numbers suggest that more individuals have decided that the only way to play the market is to opt for the diversification and relative safety of funds. There’s nothing wrong with that, of course. Indeed, it’s the smartest move many investors could make.
But some individuals who have the wherewithal to buy individual stocks may be missing some great opportunities in the 1990s if they stick only with mutual funds. Who wouldn’t have liked to have bought Boeing Co., for example, at $39 early this year, considering that it’s $61 now? Or Van Nuys-based security services firm Pinkerton Inc., which sold stock at $14 a share in April and is at $20 now?
Individuals overall have been reducing their exposure to the stock market for a long time. In the market’s go-go years of the late 1960s, stocks composed about 47% of an average household’s financial assets (excluding real estate and retirement funds). Last year, the stock portion of household financial assets was 27.4%.
Should small investors own more stocks--and, specifically, more individual issues? Obviously, that depends on each person’s financial resources and willingness to take bigger risks for potentially bigger gains. If you can’t afford to build a portfolio of at least 10 stocks, you probably don’t belong in the market, unless you’ve got money to burn.
But if you’re mulling the idea of individual stock investing, the market environment of the 1990s may well be on your side. Why? This decade is shaping up as a stock-picking decade, an era of back-to-basics investing. If you did your homework in the 1980s and picked stocks that showed consistent earnings growth, your efforts might have been for nothing. In the ‘80s, many investors weren’t investors at all but short-term traders looking for the next takeover candidate.
That’s all done now. Today, the stocks that are in demand are those that have real stories behind them--strong franchises, great business prospects and strong earnings growth. Those stocks often require patience, because they move along as the companies prove themselves year after year. In that kind of market, the individual has an advantage over the institutional, big-money player, because the individual can afford to be patient. Money managers, in contrast, often operate with only one goal in mind: how to survive the quarter without being fired.
Donna Hostetler, research chief at Los Angeles brokerage Crowell, Weedon & Co., believes that the trends in the market and in society generally favor the return of the individual investor in the ‘90s. “Each decade appears to be dominated by a certain class of investor,” she notes. “In the 1960s this distinction fell to the individual; in the 1970s pension funds and other institutions controlled the investment scene; for the past 10 years, corporations and arbitragers have been the primary force.
“We believe the options have come full circle,” Hostetler says, “and that the individual will once more be the dominant market force.” With the aging of the baby boomers, the pool of people putting money away for the long term will rise inexorably, Hostetler notes. Those investors will likely look around at real estate, bonds, bank CDs and other options, and decide that stocks offer at least as much potential, if not more.
If you’re not comfortable with individual stocks, stay away from them. But if the market intrigues you, this may be the best decade yet to be a part of it.
SHRINKING STAKE
The average investor’s stock ownership, as a percentage of his or her total financial assets, has declined sharply from the late 1960s.
Percent of household financial assets in stocks ‘90: 27.4% ‘85: 28.9% ‘80: 30.4% ‘75: 28.9% ‘70: 41.2% ‘65: 46.9% ‘60: 42.2%
Source: Federal Reserve
