Older, Wiser Small Investors Taking Stock Slide in Stride
John E. Brown learned a lot from the 1987 stock market crash. And what he learned has kept him calm--even in the face of a recent free fall in stock prices that has pared the value of his portfolio.
His investments, once in individual stocks, are now better diversified through mutual funds. He is patient because he is investing for the long term. And he’s far better educated about the market than he was less than seven years ago, he says.
“I am not changing my portfolio because of this,” says Brown, a 44-year-old attorney from Riverside, speaking of the recent slide that has seen the Dow Jones industrial average fall nearly 8% amid renewed fears that Wall Street’s bull market may finally be over.
On Thursday, the market’s roller-coaster ride continued with the Dow falling more than 65 points before closing up a modest 9.21 points--its first advance in six trading days.
Millions of individual investors like Brown appear to be taking the recent market selloff in stride. Thanks in part to a sweeping trend toward investing in mutual funds and retirement plans--which tend to have a long-term orientation--individuals are less likely to panic as many did in the 1987 crash, experts say.
Demographic trends also are a factor, as baby boomers who are investing for retirement--and willing to ride out short-term declines--make up a huge and growing force among small investors.
And small investors are considerably more educated--learning, for example, that stocks usually recover from selloffs. Applying the age-old money-making rule--”buy low, sell high”--some small investors are just as likely to buy when stocks drop.
“Individuals are finally somewhat smarter. They are older and wiser. They have been through market corrections before and they realize they never should have sold,” says Joseph Wahed, chief economist at Wells Fargo Bank in San Francisco.
To be sure, a long and sustained slide in stock prices could shatter the confidence of individual investors and send them heading for the exits. Indeed, many individual investors have sold some of their investments in mutual funds that hold bonds and foreign stocks--two market segments that have declined much more sharply that U.S. stocks.
“If this thing continues for another month, I think you might see a change,” economist Wahed says. “Really, you have to have nerves of steel to resist selling.”
But influenced by forecasts of rising corporate profits and strong economic growth--a point underscored Thursday when President Clinton said Americans should remain confident “the fundamental economy is sound”--many individual investors for now say they’re either staying put or investing more. Indeed, market experts blame the recent selloff primarily on actions of big institutions and managers of huge multibillion-dollar investment funds.
“I am confident that regardless of what the stock market does tomorrow or the next day, it will eventually come back,” says Mike Strievy, a 67-year-old arbitration judge from Chatsworth. “In fact, if the market falls a little further, I may put more money in. And if it falls after that, I’ll put in a little more.”
Riverside attorney Brown also continues to invest regularly. “This (recent slide) just means that I’m buying at lower prices,” he says.
If this sense of calm continues in the face of further erosion in stock prices, it could have a sweeping effect on the world’s financial markets, bolstering stock prices over the long haul and bolstering confidence in the economy, market experts say.
Individual investors now have roughly $5.3 trillion invested in stocks, either individually or through pension and mutual funds, according to Federal Reserve data. That total--and the market-moving power it brings with it--dwarfs stocks owned by such institutions as life insurance companies, banks and foreign firms, which amount to just over $1 trillion.
Other technical shifts in investing patterns also bode well for the stock market, experts say. Specifically, since 1987 there’s been a dramatic increase in investing through mutual funds. Mutual funds now own roughly $667 billion worth of corporate stocks--about 11% of all U.S. equities--compared with just $182 billion, or 6.5%, in 1987.
Unlike brokers selling individual stocks, who earn commissions when investors buy or sell, mutual fund companies earn profits by charging annual management fees. Accordingly, they have an incentive to keep investors from the frequent buying and selling that brokers find profitable.
As a result, fund companies have made a herculean effort in recent years to educate investors about the dangers of trying to “time” market swings, counseling them instead to hold on when trends seem bleak. Their message: Over the long haul, stocks perform better than other investments, even though their prices bounce around in the short term.
The message so far seems to be paying off.
Boston-based Fidelity Investments, the nation’s largest fund company, reports a huge increase in individuals calling for information about the stock market over the last week. But, by and large, these customers haven’t been selling.
Aside from modest shifting of money into money-market funds from stock and bond funds, investors haven’t been doing much of anything, says Neal Litvack, executive vice president of Fidelity.
In the days after the October, 1987, crash, some Fidelity stock funds shrunk by 10% to 15% in a matter of days as investors took their money and headed for the door. Notably, starting in late 1987, the market almost immediately bounced back. But individual investors didn’t return to stocks for nearly two years, after the market had climbed significantly, experts say.
There has been a demographic shift among investors as well--a natural consequence of the aging of the baby-boom generation. Many baby boomers--having already bought homes and beginning to see their grown-up kids leave--have shifted their emphasis from spending to saving as they find themselves ever closer to retirement.
To underscore the point, mutual funds report that the percentage of their investors’ money in retirement-oriented accounts has soared to about 40% from about 20% in 1987. Additionally, some 42% of the new money that continues to flow into funds is going into retirement accounts, adds Steve Norwitz, a spokesman for the T. Rowe Price mutual fund company in Baltimore. Since this is money that investors are unlikely to tap for short-term needs, it tends to be fairly stable, Norwitz notes.
But what may be more significant is that investors have been seasoned by experience and educated by an increasingly sophisticated financial media, experts say.
A decade ago, business pages in the newspaper--often just a page tagged behind the sports section--tended to report events without spending much time analyzing them, says John Markese, president of the American Assn. of Individual Investors. But in the last several years, newspapers have made a greater effort to examine the reasons behind financial trends, and that’s given investors a greater sense of perspective when dealing with a market slide.
In addition, investors have weathered steep drops in market prices in 1987, 1989 and 1990. And in each case, stock prices not only bounced back to previous levels, they continued to hit new highs.
“I have seen this before,” says Mitchel Von Wieser, a 73-year-old Laguna Hills retiree. “Investing in stocks isn’t a crap shoot. I have invested in real businesses that are doing well. There is no reason to panic.”
Adds Howard Gordon, a Palm Springs-based certified public accountant: “I’m a long-term investor, and in the long term, this doesn’t mean anything.”
* A WILD MARKET: First quarter review and the outlook for stocks. D1
