Commentary: Confessions Of A Financial Bungee Jumper

When it comes to personal finance, I'm a procrastinator par excellence. But a few weeks ago, I bit the bullet: Tired of staring at the measly returns that my 401(k) money was getting in the safe-but-sorry fixed-income category, I picked up the telephone, pressed a few buttons, and boldly remade myself into a financial bungee-jumper, plowing 80% of the existing and new contributions into a stock-index fund. Next, I'm going to reshuffle the money in my lazy individual retirement account, which could easily be worth triple what it is today if I had done the right thing years ago. I'll try an index fund, a small-cap fund, an emerging-market fund--the whole ball of wax. Just in time to be too late, you say? Doubtless many readers, including some of my colleagues, will guffaw as they read this and interpret my tardy activism as a sure sign that the market will go into a free fall. But I think the market has some growing room. Here's why:

Reason No.1: There are a lot of people out there just like me--or worse. Yes, you would think that, with the outpouring of personal-finance advice in the media, all Americans were assiduously tending to their investments. But many of us are too preoccupied with other things--kids, parents, jobs, commuting--to devote the time that professional investors do to their portfolios. And even when we know what we should be doing, we put it off. And rationalize. "I'm waiting for the market correction" was my own favorite refrain.

But at least I'm in a 401(k). Isn't everybody, you say? No. In fact, only about 75% of workers who qualified for 401(k) plans in 1995, or 28 million people, participated in them, says David L. Wray, president of the Profit Sharing/401(k) Council of America. That's better than some years ago, but it still means that about one person in four is passing up the chance to save income for retirement on a tax-deferred basis--and often missing the chance to receive the employer's matching contribution.

Eventually, though, most procrastinators get around to doing what they're supposed to do. That means starting 401(k) plans and, more important, investing in the stock market. A tidal wave of money washed into mutual funds in January, and, says Wray, the "momentum" is there for the money to keep flowing--as more companies offer 401(k)s and as more people join up and save more of their incomes. The weight of all that money will keep stoking the market. The money in 401(k) plans was estimated to have increased by nearly 50% last year, to about $700 billion.

Reason No.2: Inertia is a powerful force. For years, the wizards of Wall Street warned about the small investor and how panicky she was apt to be in times of stress. But such fears have proved unjustified. Just as it can take many people years to start a 401(k) plan or put money in the stock market, once they've made their move, they're likely to stay put. An investor who neglected to watch the ticker and track mutual-fund performance is not going to be transformed into a market maven overnight.

Welcome to the new world of patient capital--capital that's owned by not-so-savvy investors and savers who won't jump out of the market on a whim. Individual stocks and certain sectors will, of course, continue to fall in and out of favor--as money managers invest that money for the masses. But the market overall won't be shunned.

Reason No.3: Demography is destiny. If you're like many other people, you're probably tired of reading about the baby-boom generation--the giant cohort now entering middle age, consuming less and saving more, worrying about their kids' college education, and generally changing the world as we know it. But big numbers have a big economic impact. Edward E. Yardeni, economist at Deutsche Morgan Grenfell/C.J. Lawrence Inc., predicts that the U.S. economy is entering a "golden period for both personal income and saving" as baby boomers move into the top-earning 45-54 age group. In fact, by 2000, he figures this age group could well number 20 million households and account for 60% or more of all income.

All of this is another way of saying something pretty simple: that there seem to be more buyers than sellers out there lately. I can hear the tut-tuts: But what about the economy? Of course, what happens to the economy matters. If interest rates climb, if inflation rebounds, then all bets are off, and I for one will be making a few adjustments to my retirement portfolio. But the key here is magnitude. A flurry in prices or an uptick in rates won't change my mind--and probably won't alarm other folks like me. Slowly but surely, millions of us are becoming armchair capitalists.

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