‘90s Battle Cry for Baby Boomers? It’s Buy and Hold
If you want to see the future--or what we’d better hope is the future--take a look at mutual fund purchases since last summer.
The Persian Gulf crisis came and went. The economy slumped and may or may not be climbing out of that funk now. Real estate prices tumbled. Yet through it all, investors’ appetite for long-term stock and bond funds has been amazingly strong:
* Net purchases of stock and bond funds, which is new purchases minus redemptions, stayed above $2 billion a month even through the dark days of last September and October, when gloom about the markets was thickest.
* In February, as the stock market surged, net fund purchases jumped to $5.7 billion, according to figures released Thursday by the fund industry’s trade group, the Investment Company Institute. That total exceeded net fund purchases in all but two of the last 26 months.
* In March, the action calmed a bit, as the stock rally slowed. But many fund firms say purchases remained strong, if not at February’s pace.
The net-purchases figure is a good indicator of the strength of interest by new investors in mutual funds versus decisions by current fund investors to sell out. But it doesn’t tell the whole story because it doesn’t account in full for exchanges among the funds--such as when an investor shifts from a stock fund to a money fund in the same fund group.
Throw in exchanges into and out of stock and bond funds, and the trend still looks surprisingly healthy. Stock fund investors, for example, pulled money out of the funds last August and September, on balance. But the money flow turned positive by October, and by February exchanges alone added $1 billion to stock funds.
The numbers suggest that many individual investors have decided that the smartest strategy is to invest through thick and thin, ignoring short-term crises and betting on being winners in the long term. That strategy looks pretty smart now, of course, with the stock market near record highs and interest rates sharply lower. But imagine how tough it was to make a purchase decision last fall when the world seemed to be coming to an end. Yet people did.
For several years, many economists have been predicting that aging baby boomers would soon begin investing in a big way. In the 1980s, they spent like mad. But most boomers now are in their 30s or 40s. Many have just about every new household gadget they could hope to own. What most don’t have is any substantial savings pool.
That has to change, or an entire generation faces a bleak retirement, and their children will never be able to afford college. (If you have an 8-year-old kid, college is only 10 years away. Think about it.)
Is the stock and bond fund sales strength of the last two years a signal that the boomers finally are serious about saving for the long haul? Michael Hines, who tracks investing habits for Fidelity Investments, the largest fund firm, argues that the trend has “absolutely” shifted and that there is much more to come. “For the first time since the mid-1960s, the average investor is a buy-and-hold investor,” Hines contends. “It’s becoming fashionable for people to save.”
True, mutual fund sales were even hotter than today in 1986 and 1987, only to evaporate with the 1987 market crash. But in ’86 and ‘87, bond funds were the big sellers, as older investors sought high yields. Last year, stock fund net sales topped bond fund sales for the first time since 1983. Stocks are clearly the choice of younger investors.
What’s more, investors today seem much more deliberate about their fund purchases. At the Oppenheimer Management fund group in New York, sales manager Jim Ruff says the number of investors joining a special plan that automatically shifts money monthly from a checking account to stock or bond funds is up “by leaps and bounds.”
Some experts still question the permanence of all of this. On Thursday, the government said the personal savings rate for February fell to 4.4% from 4.7% in January. That rate is the simple difference between income and outlays. In the early ‘70s, the rate topped 8%. It fell to 2.9% in 1987, but since 1988 has stabilized around 4.5%.
If this recession has scared people, why haven’t they squirreled away much more money? One answer is that many consumers have been using savings to pay down debt, economists say. That certainly is a healthy trend in itself.
But David Resler, economist at Nomura Securities in New York, also argues that a 4.4% savings rate is misleading. That’s a per-person number, he notes. In the 1960s and early 1970s, most households had only one working spouse. Today, generally, both spouses work. So if both are saving 4.4%, that may be the equivalent of the old, much higher savings rates, as far as the family is concerned. “And the relevant economic unit is not the individual, but rather the family,” Resler says.
Still, it’s clear that the nation needs a much bigger savings pool to reduce our long-standing capital dependence on foreigners. If the optimists are right and strong fund purchases are an early sign of what aging baby boomers will do with their money in the 1990s, the implications for the economy and the markets may be dramatic indeed.
