You may have rubbed your eyes picking up Sunday’s New York Times , with its front-page headline ” Small Investors Flee Stock Market Even as Companies Recover .” Reporter Graham Bowley grabbed readers’ attention with his second sentence: “Investors withdrew a staggering $33.12 billion from domestic stock mutual funds in the first seven months of this year.”
That certainly sounds like a lot of money, and the Times cited an unimpeachable source: the Investment Company Institute . Moreover, the Times article reinforced what bloggers and others have been telling us for weeks: Stock funds are out, and bond funds are in, as everyone gets spooked about the future of the economy.
If, however, you were reading the Los Angeles Times this weekend, you would have seen Tom Petrino’s Market Beat column , which said in its second sentence, “[S]tocks continue to get the bulk of the money that investors are committing to mutual fund portfolios.” Petrino’s killer number was that “gross purchases of stock funds totaled $724 billion, 29% more than the $561 billion that flowed into bond funds.” His unimpeachable source? That’s right: the Investment Company Institute.
So two columnists looked at the same figures and came to opposite conclusions: Investors are pulling out of the stock market, or investors are putting a lot more into the stock market. Is this as simple as a glass half-full and a glass half-empty?
To an extent—but the New York Times version was heavy on sensation and lighter on context. The chief reason the columnists’ conclusions differ is the distinction between gross and net purchases. So, yes, a lot of people were selling stock funds in the first half of 2010—but a lot of people were buying them, too. The net withdrawal number certainly has its significance, but if you don’t put it in the context of what is still hundreds of billions of dollars going into stock funds, there’s a high chance of misleading readers. Similarly, you would not know from reading the NYT that the total amount invested in stock funds—$4.6 trillion as of June 30—remains almost twice as high as the total amount invested in bond funds ($2.4 trillion).
There’s a broader question, too, which suggests that analysts should avoid getting too carried away by these statistics. While it may be historically true that measuring individual involvement in the stock market is a good way to understand how Americans feel about the stock market in general—which was the basic thesis of the NYT story—it’s also true that the way in which the bulk of Americans invest in both the stock and bond markets is mediated in several significant ways. Retirement advisers usually favor some mixture of assets that becomes more bond-heavy over time, and the increasing popularity of “target-date” mutual funds to some degree automates that shift; it’s hard to know precisely what percentage of those “fleeing” the stock market are, in practical terms, doing nothing at all. Finally, it’s worth having some historical perspective on this; even the current number cited by the NYT as a recent low for the percentage of money in 401(k) accounts invested in stock funds—57 percent—would have seemed pretty high to investment advisers who came of age during the long bear market of the late 1960s and 1970s . So today’s “fleeing” of the stock market could be little more than a return to yesterday’s conventional wisdom.