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Still in stocks? You're hardly alone

Investors continue to pump huge sums into stock mutual funds, even as bond funds rise in popularity as a safer alternative. But is the shift from stocks to bonds just in its early stages?

August 21, 2010|Tom Petruno | Market Beat

For a nation that supposedly has forsaken stocks, we're still shoveling a lot of cash in that direction.

In fact, despite the reams that have been written about Americans' torrid romance with bonds, stocks continue to get the bulk of the money that investors are committing to mutual fund portfolios.

In the first half of this year, gross purchases of stock funds totaled $724 billion, 29% more than the $561 billion that flowed into bond funds, industry data show.

Where's the purported bond mania at stocks' expense?

That idea has become sound-bite financial wisdom that oversimplifies what people have been doing with their money in the aftermath of markets' meltdown in 2008.

Unquestionably, many Americans have become much more cautious about investing, and particularly about investing in stocks.

But there also are millions who continue to pump their savings into the equity market, undeterred by the '08 crash or by constant warnings of impending doom.

That's right: You are not alone.

Some investors have made a conscious decision to trust in the conventional wisdom that stocks will produce better returns in the long run than most other asset choices.

Others no doubt are on cruise control in their 401(k) retirement plan or other automatic savings program: They opted years ago to invest a certain portion of their paycheck in stock funds and they haven't revisited their plan choices since.

Inertia is a strong force, even when it comes to something as important as your life savings.

The oft-quoted statistics about a big move into bond funds and away from stock funds are accurate in measuring net cash flows: Take gross purchases and subtract from them the amount of redemptions by investors who are cashing out of their funds for whatever reason — to pay for living expenses in retirement, for example, to invest the money elsewhere or just for fear of losing.

In the first half of this year, redemptions of stock funds by people who needed or wanted their money were large enough to nearly offset the $724 billion in gross purchases by new buyers. The result was a net cash inflow of just $9 billion to the funds, according to the Investment Company Institute, the fund industry's trade group.

By contrast, redemptions of bond funds were much less than new purchases, leaving those funds with a hefty net inflow of $156 billion in the half.

So bond fund assets are growing rapidly, but they're still significantly less than what's in stock funds. Bond funds held $2.4 trillion as of June 30 compared with $4.6 trillion in stock funds.

Mutual funds are just one corner of the investment universe, of course. But given the industry's size, the collective decisions of fund buyers and sellers tell us a lot about how average investors perceive risk and reward in the markets.

Though net redemptions from stock funds surged with the market's plunge in 2008, they're minor compared with the sums that have fled during other grim times.

Investors pulled a net $234 billion from equity funds in '08, by far the largest dollar amount for any calendar year. That amounted to 3.6% of total fund assets at the start of that year.

But in 1988, following the October 1987 market crash, investors yanked 8.5% of stock fund assets even as the market steadily recovered.

And from 1976 through 1979, amid rising inflation, rocketing short-term interest rates and a general economic malaise, outflows from equity funds averaged a stunning 11% of assets per year.

This time around, fund investors may be nervous, disappointed, disgusted or some combination of all three as they mull over the market's prospects, and many clearly have called it quits. Yet there's still a huge amount of money coming into stock funds to largely offset what is leaving.

The obvious question that raises: Are we just in the early stages of a shift by Main Street investors away from stocks and into bonds and other fixed-income investments?

Naturally, performance will be a crucial issue driving investors' decisions. If stocks dive again, a tidal wave of money could come pouring out of equity mutual funds. A long downward market grind also could do the trick.

But other forces may work to keep more of investors' nest eggs in stocks compared with what followed other periods of market mayhem.

One is the surging popularity of "target-date" mutual funds, or lifestyle funds, which invest in a mix of stocks and bonds geared to investors' target year for retirement. As that year grows closer the funds' percentage of assets in stocks declines and the percentage in bonds rises.

On average, target-date funds now are getting 24.5% of every dollar that 401(k) investors contribute to their accounts, up from 20.5% in August 2008 and the most of any type of asset, according to Hewitt Associates, which tracks activity in more than 2 million active 401(k) accounts totaling $100 billion.

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