> Very recently, I read: "Financial investments are unlike other investments > such as property. They need constant servicing." > > "Constant servicing" This is a euphemism for share-churning! It is a > description of what pension funds, investment funds and insurance companies > have been doing increasingly in recent years -- and why they are now > finding themselves in deep trouble, not to mention the millions of ordinary > people who have already lost large chunks of their lifetime savings. > > Keith Hudson
Add this to Keith's thoughtful statement about what it takes to keep up investment portfolios for the retired and retiring. REH July 14, 2002 Crisis, What Crisis? By ROB WALKER LAST week, President Bush went to Wall Street to address what practically every market observer had labeled a "crisis" in the confidence of American investors. "I'm calling for a new ethic of personal responsibility in the business community," Mr. Bush said, "an ethic that will increase investor confidence." It's easy to understand why this is the White House line, as politicians in both parties look for ways to turn an investor-confidence crisis into electoral gains. It's equally easy to suggest reasons why investors might feel crisis-ridden, having watched as the Standard & Poor's 500-stock index and the Dow Jones industrial average last week fell to their lowest levels since 1997. What's less easy to do is come up with any hard evidence that investors themselves actually believe the sky is falling. For starters, no one seems to be stuffing money into mattresses. Despite predictions that consumers would to stop spending out of fear that the economy is about to collapse, they simply haven't. "I'm still spending," Amy Zarichnak, 30, said last week in Pittsburgh, after going shopping on her lunch break. "Even if Martha Stewart goes down, the U.S. economy won't. I'm not worried." True, Henry Paulson, the chief executive of Goldman Sachs, said in a speech last month that he had never seen such widespread skepticism of American business. And a Gallup poll in June found just 20 percent of respondents had "confidence" in "big business." But it turns out the last time this poll number dipped so low was way back in . . . 1995. Even at the height of the 1990's boom - when few politicians had unkind words for business, and C.E.O.'s grinned like pop stars from the cover of every magazine - the Gallup approval number never rose above 30 percent. Similarly, a recent column in The Wall Street Journal implied that employees were losing faith in their employers and admonished C.E.O.'s to work hard to "maintain faith" among the rank and file. But another Gallup poll found that 9 out of 10 workers trusted the executives who ran their firms, as well as those who handled its finances and accounting; that's about where the numbers were in April. (Although workers do have less trust in the leadership and bean-counters at other companies.) Perhaps most important, Americans continue to put money into stocks, largely by way of passive contributions to their 401(k) retirement accounts. Fund deposits have outstripped redemptions by a wide margin - a net addition of more than $70 billion to equity funds in the first five months of the year, according to the Investment Company Institute, a fund industry trade group. Over the past two weeks there has been a small net removal of money from stock funds. Still, said Brian Portnoy, a fund analyst at Morningstar, a research firm, "The real story is that most investors aren't panicking." Moreover, a June poll by Ipsos Public Affairs, a New York market research company, found that investors' plans for investing over the next six months have hardly changed since the beginning of the year; indeed the percentage who planned to reduce their stock holdings was just barely higher than it was in late 1999. THIs leaves the major stock indexes themselves as the most conspicuous and up-to-the-minute site for proof of an investor confidence crisis. It's certainly true that those indexes are way off their historic highs. The S.&P. 500, for example, was down 40 percent last week from its peak in March 2000. But by historical standards share prices are still surprisingly healthy. The most basic gauge of a stock's worth is the amount that investors are willing to pay for underlying earnings (the amount per share that the company is projected to earn over the year). Historically, stocks have traded, on average, at about 15 times earnings. Right now the stocks that make up the S.&P. 500 are trading at about 16.5 times expected earnings, according to Charles Hill, director of research at Thomson Financial/First Call. That number probably understates investor sentiment, because it's based on earnings estimates that will probably be revised down. In other words, by this measure, investors actually seem slightly more optimistic than the historical norm. Mr. Hill points out that figuring in the effects of today's low interest rates explains some of this, and concludes that the market is probably slightly undervalued. "We're borderline," he said. Past crises in investor confidence, by contrast, have always left stocks clearly undervalued, but despite the great declines from the market's giddiest peaks, that hasn't happened yet. It's not that investors have no reason to worry. They have many. What's surprising is that, despite all the political posturing and all the ugliness that has turned the business pages into scandal sheets (as Mr. Bush put it), investors still aren't as pessimistic as they could be. It's possible that this is a triumph of rationality, since there's no law that stocks must dip below their past price-to-earnings patterns before things get better. On the other hand, it's also possible that investorsstill aren't worried enough.
