The market is disappointingly flat and our lack of investing enthusiasm shows in sparse mutual fund flows and a flagging national savings rate. But experts say now is no time to give up on your long-term plan.
The market has been choppy since the first part of the year, mostly going sideways, which makes individual investors reluctant to commit new money. According to the Investment Company Institute, mutual fund flows for August came to just $8.5 billion, which barely covers estimated contributions to retirement plans such as 401(k)s, said Don Cassidy, senior research analyst at Lipper Inc.
"Basically it means... people are still on automatic pilot with their 401(k) money, but everything else - taxable accounts, contributions to Individual Retirement Accounts, the kids' 529 plans - totaled zero," Cassidy said. "And since we know something is going into 529s, that means the taxable accounts are a net withdrawal. This is a society that's living it up on credit cards."
More discouragingly, the Department of Commerce reported last week that our personal savings rate was in negative territory for a third straight month, a trend expected to continue in September amid back-to-school costs and the impact of hurricane season. And looking back over numbers provided by ICI over the longer term, it's clear there have been some months when the public took money out of mutual funds, Cassidy said.
"Dissaving. Unsaving. Reverse saving," he said. "And you ain't gonna retire pleasantly on that, folks."
Part of the problem is that it's tough to get excited about investing and saving when the market is dull, said Mark Meyerowitz, an investment manager in West Orange, N.J. But if it's action you seek, you'd be better off watching sports or going to a casino than looking for it in your investment portfolio. A contrarian who likes to follow long-term trends with the aid of charts, Meyerowitz sees good reason to keep buying, despite the fact that returns seem stuck in the mud.
"The important thing is you want to be invested when the market takes off," Meyerowitz said. "We can tell now where the right place is, we just don't know when the right time is, what day it will happen. And it probably won't happen when anyone is noticing. No bell will go off. And before you know it you'll be up 10 or 15 percent. Markets take off when no one is looking."
Countless studies underscore the fact that successful investors don't wait for the market to inspire them - including a September survey of 401(k) balances conducted by ICI and the Employee Benefit Research Institute. It found that Americans who continuously maintained 401(k) accounts from 1999 to 2004 saw their balances rise by an average 36 percent, despite enduring one of the worst bear markets since the Great Depression. In 2004 alone, the average account balance increased by 15 percent. A big reason for this success was consistent participation, said Jack Van Derhei, EBRI's research director and co-author of the study.
Another EBRI-ICI study, released this summer, offered even more compelling evidence that sticking with your investment plan through thick and thin is the best way to come out ahead. Using simulation models, the researchers tracked 401(k) accounts over much longer periods, and through all kinds of scenarios - such as the worst 50 years, the best 50 years, with a bear market in the middle and at the end.
No matter what scenarios were used, "It was absolutely, without a doubt, the case that the most important thing was people just continue to participate in 401(k) plans year over year," Van Derhei said. "Doing that is much more important than just being lucky or being born in the right year."
Of course, despite all this research, it's still difficult to convince people, particularly younger workers, to commit to investing over the long term, and those who do often don't take on enough equity risk to achieve their retirement goals. That, plus trying to persuade people not to bet their nest eggs on company stock, are the two biggest problems for retirement investors, Van Derhei said. "It's hard to believe, but people still don't understand the idea of diversification," he said.
On that front, there is some good news. Mutual fund flows, however sparse, suggest people are making wiser choices, favoring value portfolios and dividend funds. And lifecycle funds, which offer instant diversity with a mix of stocks, bonds and cash that automatically shifts to a more conservative allocation as the investor's retirement date approaches, are rapidly gaining popularity.
Through the end of August, lifecycle funds had gained $13.3 billion, accounting for nearly 12 percent of total equity flows so far this year, according to Lipper. Total net assets in the 199 lifecycle funds tracked by Lipper currently come to $58.4 billion - about 18 percent of the amount stashed in Standard & Poor's 500 funds, and more than any single type of sector fund. If you've been procrastinating on a long-term plan, this could be an easy answer.
"They always say pay yourself first, whether in mutual funds or in the bank, because if you pay yourself last, guess what? At the end of the month there's nothing left," Cassidy said. "Find some kind of investment you can live with so you can allow yourself to do it. Whether you believe Social Security will be there for you or not, it's still not going to be enough. And more is a much easier problem to have."
On the Net: