Dismayed by Bear Market, More Are Throwing In Towel on Stocks

More investors are giving up on stocks, even when it comes to long-term retirement accounts.

Data reported Thursday show that redemptions outpaced cash inflows to stock mutual funds by nearly $500 million in January.

At the same time, an index that tracks how 1.5 million workers divide their contributions to employer-sponsored 401(k) retirement plans found that 61.3% of the money went into stocks in January, down from 68.4% for all of 2002. The latest figure was the lowest since Hewitt Associates launched the index in 1997.

Mutual funds normally see heavy net buying at the start of the year, in part tied to investors’ opening of new retirement accounts. Yet spooked by the long bear market and now by the threat of war, a growing number of investors are balking at financial pros’ standard advice to trust stocks for the best returns over the long haul.

Doug Morgan, a 36-year-old software developer from Irvine, is among those who have scaled back on stock fund purchases. He said he slashed his regular 401(k) contributions to 3% of salary from 6% last summer after coming away “unimpressed� from a meeting with plan representatives.

Morgan has kept his 401(k) dollars in Janus Capital Group Inc.’s flagship Janus Fund, a 1990s bull market star that has lost an annualized 25% in the last three years, according to fund tracker Morningstar Inc.

Of course, many investors continue to buy stock funds. Gross purchases in January totaled $72 billion, according to a report issued Thursday by the Investment Company Institute, the industry’s chief trade group.

But that inflow was down 21% from a year earlier, and redemptions for the month outpaced the new money invested by $466 million. The net cash outflow was the first for any January period since 1990. It also marked the seventh month of outflows in the last eight.

By contrast, in January 2002 stock funds had a net inflow of $19.4 billion.

Investors have grown increasingly gloomy about the market’s prospects this year as share prices have continued to slide. The Dow Jones industrial average, at 7,884.99 Thursday, is off 5.5% since Jan. 1 after falling 17% in 2002, 7.1% in 2001 and 6.2% in 2000. Broader market indexes have suffered deeper declines over the three years.

Cash outflows from stock funds appear to have accelerated in February. TrimTabs.com Investment Research of Santa Rosa, Calif., projects an outflow of $13.2 billion for the month.

Major fund companies confirm that February stock fund cash flows look weak at best. Vanguard Group said flows are “essentially flat,� Fidelity Investments believes an outflow is likely and T. Rowe Price Group Inc. expects a “modest� inflow.

Usually at this time of year stock funds benefit as investors open new IRA accounts ahead of the April 15 deadline for the previous tax year. It’s a season when fund companies can count on investors to be thinking long-term with their savings.

This year, however, IRA investing is off to a slow start, several big fund companies say. They mainly blame war jitters and investor discontent after three years of losses on Wall Street.

But another factor also may be holding people back: uncertainty over President Bush’s dramatic proposals to overhaul the nation’s retirement-finance system, which call for the end of tax-deductible IRAs in favor of new accounts that would allow people to shelter larger amounts from tax, but without upfront deductions.

Vanguard, Fidelity, T. Rowe Price and Charles Schwab Corp. all said IRA investing is down from a year earlier, at least through January -- though they note that many investors tend to wait until closer to the April 15 deadline to open accounts.

For the stock market, the dwindling buying interest on the part of small investors is further eroding a key driving force of the late-1990s bull market.

Instead of investing in stocks, more Americans are buying bonds and other fixed-income securities. Bond mutual funds had a net cash inflow of $12.7 billion in January, Thursday’s report said.

In 2002, bond funds took in $140.5 billion in new cash, while stock funds had a net outflow of $27.1 billion.

Though the move into bonds may be an overdue diversification move for some investors, experts also believe that too many people are buying bonds simply because those securities have performed well since 2000: As interest rates have fallen, the prices of older fixed-rate bonds have appreciated.

But bond values could drop sharply if the economy improves and interest rates rise.

In any case, avoiding stocks in retirement accounts might not be the best long-term strategy now, some say.

“It appears that investors are not looking at their own circumstances and needs, but focusing on recent returns. It’s a ‘go with the flow’ strategy of asset allocation,� said Hewitt Associates consultant Lori Lucas in Lincolnshire, Ill. “To the extent that these people may be overreacting to the market, we’re concerned.�

Likewise, some experts say investors may regret not setting more money aside in IRAs, given that there is no assurance Bush’s plan for expanded retirement accounts will become law.

“Some clients have called me asking what to do, but the worst thing you could tell anybody is to hold up on funding your retirement account,� said Ed Slott, a certified public accountant in Rockville Centre, N.Y.

“Some people may be using the proposals like an excuse to avoid going to the gym,� Slott added. “Who knows what the laws will look like if and when they get through Congress?�