In Troubled Times, Mutual Fund Investors Hold the Course

When the market stumbles, do mutual fund investors race for the exits?

The question gains urgency at a time like this -- if fund investors panic and dump shares during sharp downturns, then the market's havoc only intensifies and it becomes harder to break the cycle of fear and falling prices.

Avi Nachmany, a longtime observer of mutual fund activity, took a look at the behavior of mutual fund investors over the past 60 years and discovered something reassuring: Money doesn't flood out of funds during corrections or bear markets.

Of course, mutual fund investors sell their holdings at a more vigorous pace during the worst moments of a market swoon. But the selling is not sustained over a long period even if the trend continues downward, Nachmany found, relying on his own research and data from the Investment Company Institute, a mutual fund association. In a brief report last week, he said that based on nearly 60 years of fund history, withdrawals aimed at preserving investors' capital "have always been short-lived and limited in magnitude."

Nachmany, the director of research at Strategic Insight, a mutual fund research and consulting firm, said several studies show that three-quarters of mutual fund investors are inactive -- what he described as "the buy and hold kind." Only a small segment of mutual fund shareholders actively trade and will take action during market slumps, he said in the report.

The data show that during financial uncertainty, fund investors tend to cut back on purchases rather than unload declining shares. The flow of assets out of stock mutual funds fluctuates from 2 to3 percent a month, Nachmany said, "and only rarely exceeds this pace, including during periods of sharp price declines and uncertainty."

So why do mutual fund shareholders sit tight and wait out even a long, agonizing downturn? Nachmany has an idea: "Investors' psychological aversion to realizing losses partly explains such bear-market behaviors."

-- Steven E. Levingston