Cash Keeps Surging Out of Stock Funds

As stock prices stumble, it seems buy-and-hold types are neither buying nor holding.

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One of the fund industry's oldest rules is that cash flows to funds tend to follow performance. So with the S&P 500, the Nasdaq Composite and the average big-cap growth fund down 16%, 44% and 31% over the past year, it's no surprise that flows have gone south.

But the scale of their drop has become dramatic. Redemptions from stock funds outpaced investments by some $11 billion in July, when the S&P 500 fell 6%, according to preliminary estimates released Monday from liquidity tracker TrimTabs.com. If these estimates are accurate, July will be the third month of net outflows for stock funds this year. There were no such months in 1999 or 2000 and just one in 1998.

The upshot: Though fund investors are typically urged to invest a set amount each month and not worry about market moves, the length and depth of the market's tech-led slump have shaken their confidence in equities.

In addition to U.S. stock funds, foreign funds were also in net outflows last month by $3.7 billion, according to TrimTabs.com's tally. At the same time bond and balanced funds, decidedly less aggressive portfolios, netted about $4 billion, after losing almost $2 billion last July.

Thanks but No Thanks Fund investors are passing on stocks these days, figures in billions of dollars
Fund Category	July 2001	July 2000
U.S. Stock	-$11	$16.1
Foreign Stock	-3.7	1.5
Bond and Balanced	4.4	-1.9
Source: TrimTabs.com.

These bleak figures are just a continuation of this year's theme. In the wake of 1999's stunning gains, investors stuffed a record $310 billion into stock funds last year. But continued losses have stemmed that tide of money.

So far this year stock funds have netted just $41 billion, compared to some $186 billion at the same point last year. Foreign stock funds have lost almost $10 billion this year, having taken in $44 billion at this time last year.

Indeed, rattled investors are clearly opting for less aggressive investments. They've stuffed more than $40 billion in both bond/balanced funds and money market funds. They're also plunking their money into bank accounts, perhaps building an emergency fund that seemed less important when stocks were riding high. So far this year more than $210 billion has gushed into savings accounts, compared to $61 billion over the same stretch a year ago.

Next Stop: The Mattress Investors are putting their trust and money in the bonds and the bank, figures in billions of dollars
Fund Category	YTD 2001	YTD 2000
U.S. Stock	$41.1	$185.9
Foreign Stock	-9.9	44.1
Bond and Balanced	42.4	-60.9
Money Market	40.3	39.7
Bank Savings Accounts	210	61
Source: TrimTabs.com. SOURCE

The reflex to invest only when it's sunny on Wall Street is both strong and understandable. But if you've recently curtailed a monthly investment program either in a taxable account or tax-deferred retirement account, you might want to reconsider. We've walked you through the potential long-term advantages of monthly investing and they're mainly predicated on the principle that you're buying shares in both up and down markets -- including excruciating days like these.

Keep in mind, one way to make your portfolios' dips less severe is to use a diversified approach and include bond funds -- two strategies we've discussed as well.

Junk Pile

A few weeks ago we told you that fund shops were rolling out value funds left and right, now that the style is back in favor and seeing healthy inflows. The latest, the USAA Value fund, was born today. The firm already runs three value portfolios, so the bargain-hunting style isn't new. That said, there are plenty of solid, time-tested value funds out there. To research a few, check out today's Big Screen of large-cap value funds, as well as a list of our favorite value funds.

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