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Fund Investors Not Bonkers

Sat., July 26, 1997

When they hear themselves described simultaneously as being too bold and too cautious, it’s easy to understand why mutual fund investors might simply tune out all the criticism.

There is a certain lack of consistency in warning that fund owners are heedlessly exposing themselves to risk in the stock market - while at the same time scolding them for not being more aggressive in their investment choices for retirement.

The fact is, when you look at the available statistics, a third possibility presents itself. Could it be that fund investors, as a group, haven’t gone bonkers, but have allocated their money reasonably well among stock funds, bond funds, money funds and other investments?

In the absence of any method for divining the future, there’s no way to answer that question for certain right now. Still, some inferences can be drawn from what is known today.

On the evidence, fund investors haven’t abandoned the important principle of diversification as a means of protecting themselves.

“The popular view of the present environment is that individuals are borrowing or drawing down their cash reserves to invest in equity mutual funds because they believe common stocks are a ‘sure thing,”’ said Byron Wien, investment strategist at Morgan Stanley, Dean Witter Discover & Co. “But at least one proxy for individual cash contradicts this theory.”

The amount invested in money-market funds and small-time deposits, Wien noted, has grown from $1.15 trillion in 1994 to more than $1.5 trillion now. If people were dumping all their cash into stock funds, that total should have dropped, not grown significantly.

In Wien’s words, “mutual fund buying has been stimulated in part by individuals who have migrated from being direct holders of shares to being holders of assets managed by others - that is, equity funds.”

A great deal of money, he points out, is shaken loose from direct stock investments by corporate takeovers and buybacks of stock.

“There is certainly some ‘new’ money being invested,” Wien added. “But mergers-and-acquisitions activity has put a lot of cash in people’s hands. Many of them believe that professional mutual fund managers can invest their money better than they can themselves.”

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