Advertisement
YOU ARE HERE: LAT HomeCollections

INVESTMENT STRATEGIES: AN INVESTOR'S PRIMER AND GUIDE
TO THE INVESTMENT STRATEGIES CONFERENCE MAY 22-23

Commitment to Stocks Tenuous, Survey Finds

May 11, 1999|TIM QUINSON | BLOOMBERG NEWS

What's your tolerance for a stock market decline?

Many Americans say they would reduce their buying of stocks for their retirement accounts if the U.S. market fell 20% or more, according to a recent survey by Boston-based John Hancock Mutual Life Insurance Co.

About half the 801 people surveyed said they would either transfer money out of stocks or put less of future contributions in stocks if the market fell 20%, the level of the decline that most analysts consider a bear market.

More striking, three-quarters of this same group said they would move away from stocks if the market declined 30%.

The results indicate most Americans are "more infatuated with stocks than committed to them," said Wayne Gates, general director of John Hancock's investment and pension unit.

The John Hancock survey is a potential warning sign for the stock market because it suggests that billions of dollars could come streaming out of stocks if a sustained slump occurs.

Major U.S. stock indexes fell almost 20% late last summer, but the decline took just six weeks--and was followed by a fast rebound. Thus, many individuals may never have calculated their portfolio losses at the market's low.

The Standard & Poor's 500 index has risen at an average annual rate of 28.7% during the last four years, the first time the U.S. benchmark has gained at an annual rate of more than 20% for such a period.

These days, 75.7% 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's up from 1996, when 73.1% of all 401(k) retirement money was invested in stocks, and 1994, when 64.4% was allocated to stocks.

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).

The share of 401(k) cash going into money markets and GICs fell to 9.3% from 17.8% 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, as a traditional pension plan does, but rather depends on the future value of the investments people choose.

The John Hancock report suggests that many investors have set "their retirement plans on autopilot and they don't know if their instruments are correctly calibrated," Gates said.

The sixth annual national survey, conducted by Matthew Greenwald Associates for John Hancock, found that Americans' understanding of their investment options is declining.

Almost 85% of the respondents weren't aware that the best time to invest in bonds is when interest rates are expected to decrease, Gates said.

The number of people that answered this question incorrectly "increased significantly" in 1999 from 1997, he said.

In addition, 55% of those surveyed don't realize it's possible to lose money owning a bond fund, Gates said.

This lack of investment savvy has been a nonissue since 1995 because the stock market has been so robust. Most investors "have never had to worry about what they know--or don't know," Gates said. That will change if a prolonged bear market occurs, he said.

John Hancock isn't the only firm concerned about investors.

Vanguard Group, the second-biggest U.S. mutual fund company, sent a letter to shareholders recently, warning them that the domestic stock market is at "lofty heights."

"These lofty heights are rarely the platforms from which major market advances are launched," Vanguard wrote in the letter to shareholders. The high valuations "should be viewed as a blinking yellow light."

Advertisement
Los Angeles Times Articles
|
|
|