By Michael S. Rosenwald and Heather Landy
Washington Post Staff Writers
Friday, December 26, 2008
The bubble pops. Stock markets tumble. Investors flee.
It is the narrative of nearly every economic boom and bust, as investors scramble to find other places -- besides underneath mattresses -- to park their money.
Investors pulled $10.5 billion out of stock funds in the week ended Dec. 10, up from $3.3 billion the previous week, according to the Investment Company Institute, a trade group for mutual fund managers. A record $72 billion flowed out of stock funds in October, according to the ICI's most recent monthly data.
"We've seen major redemptions out of equity mutual funds," said Alec Young, an equity strategist with Standard & Poor's.
The hits are largely across the board, according to a report from Morningstar: "The heavy redemptions are likely due to the widespread losses that haven't been isolated to a few asset classes but have spread to more conservative asset classes and funds."
Investors also took money out of bond funds, to the tune of $4.2 billion in the week ended Dec. 10 and $2.8 billion in the week ended Dec. 3.
From the start of September through the middle of this month, about 3 percent of the assets in stock and bond funds had been yanked by mutual fund investors, according to the ICI. That's roughly comparable to investor behavior in other bear markets, according to Brian Reid, the chief economist for the group.
Who is moving all this money out of stocks and stock funds? The everyday investor, according to analysts and financial advisers. "The money moving in and out is the general public," Young said. "It's the regular investors or an adviser selling funds. But the general public is making the direction to move money out."
Bernie McGinn of McGinn Investment Management in Alexandria said investor angst really picked up in late November, particularly the week of Nov. 20, when U.S. stock markets suffered heavy losses. "People who I hadn't heard from that much called me to say: 'I can't take it anymore. I want out. I don't care where it goes, but get it out.' "
Where all the money went -- what was left of it, at least -- is hard to say, but assets of retail money-market mutual funds have risen in four of the past five weeks, according to the ICI. The biggest spike came in mid-November, when $8.4 billion flowed into money-market funds in a single week, bringing total retail money-market mutual fund assets to $1.27 trillion. As of Dec. 17, the total had climbed above $1.28 trillion.
U.S. Treasurys have also been a popular parking place.
But that doesn't account for all the money coming out of funds. Analysts at TrimTabs Investment Research estimate that retail investors pulled $86 billion out of long-term mutual funds in November. But the increase in the amount of money that went into savings, certificates of deposit and money markets from October to November was only $5.7 billion, according to Federal Reserve statistics.
Conrad Gann, the president of TrimTabs, thinks a lot of the money actually went to pay down bills, mostly mortgages. "Sadly, we are in code red on the economy right now," Gann said.
So much money is coming out that stock funds long closed to the public are reopening. Morningstar says dozens of funds have reopened this year.
But some mutual fund industry officials and financial advisers say they had expected to see more people flee the markets. Reid notes that in October 1987, investors pulled back 3.14 percent of their stock fund assets when the market collapsed. He said that in 1987 many stockholders were relative newcomers who got into the market during a good run in the mid-1980s -- and were the first out the door when stocks crashed.
Now more people have 401(k) plans through their employers. Currently about 54.5 million, or 47 percent of U.S. households, participate in the market through stock or bond ownership, according to a poll conducted earlier this year by ICI and the Securities Industry and Financial Markets Association. That's up from 39 percent in 1989, the first year for which comparable data are available.
These investors seem reluctant to move the goal posts when it comes to their long-term investment strategy, said Stuart Ritter, a financial planner with T. Rowe Price in Baltimore.
"There certainly are individuals who have done it, and I'm sure lots of people may have considered it, but when it comes to the actions people are talking, it's safe to say you're not seeing people take out everything they have in the stock market," he said. "While what we're going through is uncomfortable and frustrating, it doesn't mean it's time for a wholesale change in approach."