August 24, 2004

Older Investors Jittery as U.S. Markets Disappoint

When Concetta McGrath, 76, a widow in Staten Island, sold the home she had shared with her husband for over 50 years, she took $90,000 of the proceeds and put it into the stock market. It was 2001 and she hoped that the gains generated by the investment would bolster her monthly Social Security benefits of $800.

But soon after she invested in an Oppenheimer mutual fund, its value began to drop. When the fund lost a third of its value, Ms. McGrath cashed out, spent $15,000 on living expenses and put the remaining $45,000 into banking institution stocks for safety.

Today, some two and a half years after her foray into the market, Ms. McGrath says her account is worth $28,000. Now, she worries about outliving her money. "My friend and I were saying, 'Gee, you know, we won't live more than two years,' " Ms. McGrath said. "That's the only way you can look at it. I'm too old to look for a job." Ms. McGrath is not the only investor facing tough economic realities as a result of the disappointing United States stock market this year. With the Standard & Poor's 500-stock index down 1.5 percent and the Nasdaq composite off 8.2 percent this year, investors who thought that 2004 would repeat last year's 26 percent rise in the S.& P. are beginning to face the fact that their expectations will not be met.

"Last year's rally was a junk rally that proved that greed was not dead," said Christopher T. Casey, portfolio manager at Boston Private Bank and Trust. "What you're seeing now is greed may not be dead but it's limping." Individual investors certainly began this year with high hopes. In January, two-thirds of the 800 investors surveyed by UBS said that they felt somewhat or very optimistic about where stocks would be in 12 months. UBS said it was the highest level of investor optimism since January 2000, the height of the stock market mania. Even now, with the market well off its highs for the year, the chasm between what investors seem to be expecting from the stock market and what they will probably receive remains wide. An astonishing 18 percent of investors polled in August said they expected to generate profits of 10 percent to 14 percent in their portfolios over the next 12 months, while 28 percent said they expected to generate gains of 5 percent to 9 percent.

Just under half of the investors polled this month said that they were either somewhat or very optimistic about the performance of the stock market over the next 12 months.

In the meantime, strategists like Mr. Casey expect the market to tread water for some time to come, predicting that stock prices will remain flat for a couple of years even as earnings rise.

Investors' retirement accounts are especially vulnerable to a drifting stock market. According to a study by the Employee Benefit Research Institute of 401(k) plan activity among 4.5 million participants, 67 percent of the assets invested in such plans went into stocks last year, up from 62 percent in 2002. In 2000, at the height of the stock market bubble, equities made up three-quarters of the assets held in 401(k) plans.

While younger investors can shrug off the lackluster performance in the stock market as something to fret about tomorrow, older investors cannot. For those nearest retirement and closest to tapping into their funds, time is running out on their efforts to rebuild accounts that were devastated by the bear market of recent years.

The Employee Benefit Research Institute study found that people in their 60's are still down 8.7 percent on average in their accounts for the four-year period beginning Dec. 31, 1999, and lasting through the end of last year. Participants in their 60's with more than 30 years of tenure on the job are even worse off; their account balances fell 15.5 percent on average during the period, the study said.

The long-running bull market in stocks that began in 1982 and lasted until 2000 certainly taught many investors that a buy-and-hold strategy was the wisest way to the largest gains in equities. A recent report by the Bank Credit Analyst, an independent research firm in Montreal, noted that capital gains from securities accounted for more than half of the increase in total assets among households from 1982 to 2000.

Big gains from equities also meant consumers could set less money aside than normal into traditional savings account. As a result, the savings rate in the nation has plummeted. In June 2004, the personal savings rate in the United States stood at 1.2 percent.

But with equities going sideways, or down, some strategists say the think that consumers will shun stocks and move more money into bank accounts, certificates of deposit and other havens as they realize that a prosperous retirement may be more difficult to attain.

"It appears that a conservative set of habits is building among consumers after multiple periods of comfort with higher levels of risk and speculation in the stock market and then its successor, the housing market," said Richard D. Hastings, retail analyst at Bernard Sands in New York. "The speculative momentum to drive markets is simply not there."

Recent inflows into stock mutual funds seem to confirm this view. July's inflows were $8.9 billion, the second-lowest figure this year and well below the $21 billion average monthly inflow generated during the first six months of 2004.

According to Robert Adler, president at AMG Data Services, only a handful of fund companies experienced net inflows in July, and those were companies that had large numbers of retirement account holders. The fund flows seem to indicate that while 401(k) investors keep putting money in the stock market on autopilot, active investors are staying away.

"The large fund groups that experienced inflows have massive retirement constituencies," he said. "Because the money is coming so heavily into these groups, it is based on a more passive sentiment, predirected as early as December of last year. But active investor sentiment is flat or negative."

Some portfolio managers report growing concern among professional investors over the implications of a stagnant stock market. "A lot of our clients are foundations and insurance companies, who need a positive rate of return because they are offsetting a liability," said Alan Kral, a portfolio manager at Trevor Stewart Burton & Jacobsen in New York. "It's a difficult thing for most of them. The agita is increasing."

Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said he had encountered many investors who were staying on the sidelines because of terrorism fears.

"This year still seems to be more about fear than reality," Mr. Paulsen said. "We've had remarkable recovery on many fronts, restoration of profits, re-emergence of jobs, the continuation of low inflation rates and interest rates. But whenever I speak to investors about the economy and the markets, the first question I get is 'What about a terrorist attack?' It's hard to convince people no matter how good the fundamental story is that they should up their equity levels. There's this ghost out there and no amount of G.D.P. growth can overcome it."

Karen Orlin, 56, a corporate lawyer in Boca Raton, Fla., said she had already changed her buying habits and retirement plans because of the stock market's recent fizzle. For example, she said that not long ago she assumed her investments would allow her to retire at 60 or 62. Now, however, she plans on working until 65 at least.

"I am much more conservative in my expenditures," Ms. Orlin said. "I'm not as much of a consumer as I was five years ago." She also said that she traveled less often now and that when she did, she tried to stay with friends rather than in a hotel.

As far as her investments are concerned, she said she was less concerned with growing her portfolio of mutual funds than she was with simply maintaining its current value, which she declined to give.

Some investors, who were waiting for their battered stocks to return to precrash levels before they sold them, may finally be dumping the shares they have held so patiently. Mary Pitts, 70, a retiree in Boynton Beach, Fla., who worked for AT&T, had long planned to give her grandchildren the roughly 500 shares she had amassed in various cable and telecommunications concerns over the years. "I just figured I'd put it away and never touch it," Ms. Pitts said. "I thought my grandkids could have it in 20 years or so."

But even with her long-term outlook, she has found the market's recent performance unsettling. And so this month, Ms. Pitts sold all of her shares for $6,000, less than a quarter of the $25,000 that they were once worth. She now plans to give the money to her son, who is building an extra room on his house for the kids.

"I just held on too long," Ms. Pitts said. "I had Lucent when it was up at $62 a share. I sold it at $3."