Cashing Out Like Crazy

Mutual-fund investors are fleeing like there's no tomorrow

By 8:20 a.m. on July 9, Jill Bell was already calling her broker. She had just one word for him: Sell. "I've lost a nice little piece of change, and I don't want to lose any more," says the 57-year-old executive assistant from Atlanta. After studying her second-quarter mutual fund statements, her mind was made up: "I'd rather make no money at all than keep losing 5% of it every three months."

Bell has a lot of company. Increasing numbers of investors are throwing in the towel on their U.S. stock funds, battered by rising mistrust of Corporate America and mounting portfolio losses. In the five weeks through July 5, U.S. equity funds bled nearly as much money as they did in the weeks after September 11. In June, outflows totaled an estimated $20 billion vs. inflows of $4.8 billion in May, according to Investment Research Inc. And the trend is accelerating: Banc of America Securities Chief Investment Strategist Thomas McManus estimates that during the four-day holiday week ended July 2, another $4.2 billion headed out the door.

True, even with the recent exodus, investors have put a net $52 billion into mutual funds this year through June, slightly more than in the same period last year. Yet they turned decidedly pessimistic as second quarter losses of 12.2% by the average U.S. stock fund swamped minuscule first-quarter gains. What's worse, the latest quarter means that the three years through June produced an annualized loss of almost 4.2%--the first time in a generation that the average stock fund has shown negative returns over a three-year period.

Paradoxically, the flight from the market by ordinary investors is a heartening sign to the pros. "When people are saying forget about it, I want nothing to do with my equity mutual fund, that's usually a good sign that things are washing out," says Brian G. Belski, market strategist with U.S. Bancorp Piper Jaffray. Exactly the reverse happened in the first half of 2000, when investors giddily plowed a record $182 billion into mutual funds at the market's peak.

To be sure, sentiment polls and technical indicators have failed miserably to predict a bottom in this post-tech-bubble market. Though it seems like twisted logic, it may well be that as more investors lose hope, the nearer the market is to a bottom. Ultimately, investors will be able to climb the wall of worry only when they see a solid rebound in corporate earnings that they can trust.

By Mara Der Hovanesian in New York

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