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, noting that some investors are realizing how difficult it can be to time the market. “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.”
Often when investors retreat and decide not to ride out the market turbulence, they rush back in after a strong run in the markets. Not this time, though. Net inflows into domestic stock funds have fallen to a level not seen since 1994, the study found, suggesting that investor interest in markets abroad and, to a lesser extent, competition from new investments such as exchange-traded funds, or ETFs, have curtailed how much money investors are channeling to domestic stock mutual funds.
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