Point of Sale

Market analyst James A. Bianco is willing to venture a guess of what it would take for investors to start bailing out of mutual funds in a big way: a 30% drop from where the Dow finds itself today.

Bianco, who runs his own investment research firm outside of Chicago, arrived at his conclusion after studying the behavior of mutual fund investors and finding that most people don’t sell until the price of their shares drops below what they paid for them.

“Thirty percent is obviously a big drop, but 30% represents the level at which the average stock fund investor has bought shares,” Bianco said. That would put the Dow at about 5,500.

Bianco took all net new purchases of U.S. stock mutual funds since October 1990, weighted them and found that the money was invested on average when the Standard & Poor’s 500 index was at about 636 and the Dow at 5,500.

He chose October 1990 because it was the bottom of the last bear market, which means the vast majority of investors who bought stock funds since that date haven’t seen the market fall enough to generate losses.

And 90% of all the money invested in stock funds, or about $1.1 trillion, has flowed into these funds over the last eight years, Bianco said.