Smart money stays

NEW YORK – Only a fool would have stayed in the market after the dot-com collapse. To look past the stock market’s swoon and continue to stay invested would have been a mistake, right?

Perhaps – for those nearing retirement or getting ready to pay for college – but the strong returns that emerged after the dot-com slide again illustrate that it’s often wiser for long-term investors to simply stay invested.

It seems some investors have not learned this lesson, one that could perhaps help them navigate the market’s latest bout of jitters. Money flowing into mutual funds that invest in domestic stocks has fallen 50 percent since a peak in 2003, a study by fund tracker Lipper Inc. has found. What is perhaps most surprising is that flows into U.S. stock funds haven’t risen given the stock market’s strong performance in recent years.

“The whole phenomenon of investor flows chasing performance has been tempered somewhat in recent years due to concerns about market volatility,” said Edward Giltenan, spokesman for the mutual fund trade group the Investment Company Institute. “At the same time, we saw investors increasingly getting the message that they need to be diversified, long-term investors.”

Those investors who never left the market or those who waded back in right after the tech bubble implosion had reason to celebrate: 2003 was the strongest year since 1967 and helped make up for lost ground from previous years. And while not as strong as 2003, results in 2004, 2005 and 2006 were respectable, showing at least average gains. But it seems some investors were tending to bruises left by the dot-coms.

“I think that really put a dent on investors’ appetite,” Tom Roseen, senior research analyst at Lipper, said of the 2000 to 2002 market pullback. “So many people were not properly diversified. I think they were burned so badly that they threw in the towel.”

With investors keen on adding to their international holdings for the diversity it can bring, domestic stock funds have taken a hit. Their net flows are essentially at zero month over month, the study found. But its authors contend the picture would be worse for stock funds as a whole were it not for the popularity of life cycle funds. These increasingly popular products are designed to simply let investors begin investing and leave the fund on autopilot, to gradually move into more conservative areas such as bonds as investors approach retirement.

“People were so scared that they didn’t want to want to do any more research,” Roseen said, referring to the ease of life cycle funds and investor sentiment after the dot-com burst.

And while it’s impossible to predict where investors will head next, Roseen noted some investors are showing increased interest in funds that give portfolio managers broad leeway to invest in many corners of the markets.

“I do believe that there is going to be a shift in the tide. We are still seeing fairly strong flows in multicap funds.”