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After the Fall

No rally may be enough to entice some investors back

March 16, 2003|Tom Petruno | Times Staff Writer

For Polly Sveda, the decision about what to do with her future savings doesn't hinge on the outcome of any U.S.-Iraq war.

Others may be planning to go bargain hunting for beaten-down shares as soon as the showdown is resolved. For her part, Sveda thinks she may never buy stocks again. She's 31 years old.

"I don't trust it anymore," she says of the market. "I should never have trusted it."

U.S. stock indexes are three years and trillions of dollars -- and counting -- from their zeniths. Enough time has passed to allow investors to come to grips with their losses and decide how their bear market experiences will affect their future financial choices.

Many people have maintained a stoic long-term optimism about stocks, remembering the oft-quoted figure that the market has produced an average annual return of about 11% historically. Others may be less confident that future returns will match the past but still see the market as a better alternative to earning 1% in a bank savings account.

Lightning rallies like the one that lifted the Dow Jones industrials nearly 270 points Thursday offer hope that, post-Iraq, the picture could improve substantially. The Dow climbed again Friday, closing 38 points higher.

But for people such as Sveda, a radio producer who lives in Pasadena, no rally may be enough to entice them back into the market.

After her stock mutual funds lost a third of their value, Sveda also lost her job in 2001. She had to cash in her remaining portfolio for living expenses. Seeing her nest egg decline "forced such frugality on me," Sveda says. "I realized the market is just gambling."

She is part of what some on Wall Street have dubbed the "lost generation" -- individuals who have no more appetite for stocks, period. It's a group of people who share a mind-set rather than an age range or socioeconomic status.

Just how many are in this camp is impossible to say. But if the numbers are significant -- or if they become significant because the long bear market has yet to run its course -- a sustained recovery in share prices could be much more difficult.

That, in turn, could make it harder for companies to raise capital, threatening to limit the economy's potential.

There is plenty of evidence that a growing number of individuals are shunning stocks. For example, equity mutual funds saw more money flow out than in during 2002, the first time that has happened in a calendar year since 1988.

What's more, a Hewitt Associates index that tracks how 1.5 million workers allocate their contributions to 401(k) retirement plans found that 61.3% of the money went into stocks in January, the lowest since Hewitt launched the index in 1997. (The rest went into fixed-income investments such as bonds.)

Some evidence is more anecdotal but underscores the trend: The number of investment clubs registered with the National Assn. of Investors Corp., an umbrella organization, dropped to 30,278 as of December. That was down from 36,151 at the end of 1999.

Wall Street already knows what it's like to lose a generation.

It happened during the last severe bear market, in the 1970s. Individuals first were burned by a plunge in that era's hot young technology stocks in 1969 and 1970. Mohawk Data tumbled 84% from its 1968 high, Teledyne slid 82% and Optical Scanning lost 89%.

Then people were stung by a collapse of blue-chip shares in 1973-74 -- companies such as Polaroid, IBM and Coca-Cola. The result: Many fled the market and didn't return for a decade or longer.

Even as stocks rallied periodically in the late 1970s despite high interest rates, every year more money left equity mutual funds than came in. Millions of potential investors found other things to do with their cash. Real estate was hot. So were money market funds, gold and oil-exploration limited partnerships.

The number of investment clubs plummeted from 14,102 in 1970 to just 3,642 by 1980, according to the NAIC.

With a big segment of the public turning its back on equities for one reason or another, the Dow index didn't return to its 1973 peak of 1,051 until 1983.

Today, the question of whether another generation has been lost engenders a lot of debate. This is an emotional time for investors, as it is for the nation overall. After three years of falling stock prices -- and with many shares deep in the red again this year -- it's natural for people to say they're fed up and leery of sinking another dime in the market.

The rash of corporate and Wall Street scandals over the last year obviously hasn't done anything to help confidence either. Now, war fears dominate.

Still, a big rally could change a lot of minds in a hurry. Greed might again trump fear.

If the market started roaring back, many investors could find it hard to stay away, especially if a stock purchase simply entailed a few mouse clicks.

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