Investors Still Bullish Despite Recession

November 5, 2009 Updated: November 5, 2009

WASHINGTON—If the U.S. economy is still in flux, you can’t tell by looking at the stock market.

Investors are still bullish on stocks, despite news of more business layoffs and consumer spending cuts. Americans are still investing, but with less intensity and risk-taking, according to a recent survey by the Vanguard Group, a mutual fund manager.

While refusing to jump ship, most investors have matured during the recent recession. Vanguard found that investors now exercise greater caution, are less risky, and have toned down expectations for future earnings growth.

“Most American investors continue to view equities as a critical component of long-term investment plans, although they remain wary of risk and possess more modest expectations for future returns,” Stephen Utkus, director of the Vanguard Center for Retirement Research, said in a Vanguard study.

Fund Manager Cautious
“Vanguard is implementing a ‘cooling off’ period for Vanguard Capital Value Fund (VCVLX) by closing it to new shareholder accounts, effective immediately,” according to a recent press release.

Funds are typically closed off to new investors when the manager doesn’t want a fund to get too large or too risky. There’s usually less effect on the market when a fund manager only has to buy and sell $500,000 worth of shares, rather than $15 million.

This is not the first time Vanguard implemented a cooling off period for its investments. In 2003, Vanguard applied the same method to its High-Yield Corporate Fund and in 1999 to its Health Care Fund. Once investors’ fervor dipped after 6 to 10 months, the funds went back on the market.

This time, there are seven funds in Vanguard’s portfolio that are capped—where a single investor may only invest a certain amount—or closed for a cooling off period, stopping a frenzied bidding process.

The latest fund to be “cooled off” experienced a return of 68.5 percent between February and October, versus the 21.6 percent average return of other stock market funds, tripling the assets in the fund.

“Despite our efforts—at both a company and an industry level—to educate investors about the perils of performance-chasing, we continue to be concerned about this behavior,” Vanguard said in a statement.

Investors Galore

Seventy-five percent of Americans with a nest egg of at least $5,000 commit a portion of their savings to some kind of long-term investment fund.

Close to 60 percent of American investors kept their funds in the investment vehicle of their choice prior to the recent recession, despite the market mayhem. One-fifth of the surveyed investors trimmed their stock holdings, while 5 percent panicked and unloaded all their stocks as fast as they could.

The remaining stockholders took advantage of the plunging stock market and increased their equity holdings.

“Being four to five years from retirement or experiencing job loss or mortgage/ foreclosure problems were important factors linked to reducing or selling out of equities,” experts said in the Vanguard study.

The study found that experienced investors working with investment advisors, brokerage firms, or those with tax-deferred investment accounts didn’t lose their nerve and most held on to their equity holdings.

It found that most prosperous young professional males—holding a graduate degree or better—analyzed the stock market and bought stock of companies they believed to hold the greatest future prospects.

The stock market upheaval did not come as a surprise as “Nearly three-quarters of all respondents (73%) either strongly or somewhat agreed with the statement that they always knew ‘that large declines like [in] 2008 and 2009 could occur in the stock market,’” Vanguard said.

Only 28 percent of those surveyed felt that the large decline in investment value came as “a complete surprise.”

Close to 50 percent concluded that the volatility in the market place is hazardous to an individual’s or firm’s financial health and the stock market is no exception. Just as many people thought it was worth taking the risk despite the market disruptions and either stayed put or bought more stock, keeping in mind the trends of past recoveries.

Reality Check

Vanguard, addressing the American retirement system, brought home truths that every investor should take to heart, no matter the purpose of the investment.

“Any retirement system [or any other investment vehicle] must be judged not at its peak, or its trough, but over the lifetime of participants engaged in the process,” Utkus said in a recent statement, referring to results from Vanguard’s recent research study, “How America Saves 2009.”

Utkus said that investors need to take in the bigger picture. “It’s a mistake to anchor on the high point of October 2007 and assume that it was a guaranteed value. It’s also a mistake to anchor on the low point of late last year, or of March 2009, and assume that balances will never grow again.”

Regardless, expectations concerning future returns are quite a bit lower than during the height of the investment euphoria.

About 33 percent of investors expect long-term returns of 5 percent, while around one- half of the respondents expect the returns to hover around 7.5 percent. Those brimming with optimism expect future returns to reach 15 percent, a far cry from the bets placed on the markets a few years ago.

Cautious investors are hunting for the maximum savings rate, while many expect to work harder and wait longer for the golden years than their parents.