Press Releases

Fed study suggests investors are sluggards

By John Cunniff The Associated Press
Tuesday June 05, 2001

Popular assumptions can create vast misimpressions, such as the one that the typical American household has become a daring investor in stocks, devouring market data and trading aggressively. 

It isn’t so, or at least a careful study suggests that to be the case. The study goes even further, using words such as “passive” and “languid” in describing investors’ behaviorr, and stating that they respond “sluggishly.” 

If the study’s authors are correct, it demolishes an impression held by a vast number of people that Americans have become masters of their financial fate, daringly creating wealth like no others in history. 

It includes even some corporate chairmen, and stock brokers, market gurus, advertisers, new-age authors and book publishers, commentators and members of the media who have declaimed about the new American investor. 

They had good reason to believe they were right. Hard numbers, the sort of thing these types profess to believe in but do not always comprehend correctly, seemed to support their opinions. 

Federal Reserve figures, for example, showed household stock holdings grew from $2.6 trillion to $12.6 trillion in the 1990s. And stocks that had been just 13 percent of household assets in 1990 jumped to  

33 percent. 

Could the Fed have been wrong? It could have been, of course, but it wasn’t. 

The explanation comes from the latest study, this one issued by the Federal Reserve Bank of New York, which explains the vast distinction between aggregate and typical, and the dangers of confusing them. 

The Fed’s statistics for the 1990s are aggregates for an economic sector, the household sector. To simply divide the aggregate numbers by the number of households misconstrues and misinforms. 

If the aggregates were the result of enormous numbers of Americans changing their behavior of many years, it would represent a social change of huge proportions. But it was not so, the authors say. 

In a study for the Federal Reserve Bank of New York, Joseph Tracy and Henry Schneider found behavioral change appears to have played only a moderate role, as did demographic shifts and changing pension plans. 

“Despite intensive media attention to the stock market boom of the 1990s,” they write, “most households that owned some stocks during the period did not rush to buy more. Similarly, most households that held no stocks refrained from acquiring them.” 

The average household equity share rose in the 1990s “not so much because Americans were flocking to Wall Street’s party, but because those already attending decided to stay on.” 

By staying on, a rather passive approach, these existing investors enjoyed spectacular returns, realizing what Tracy and Schneider found was “an astonishing 26.3 percent average annual return from 1996 to 1999.” In short, Americans during the soaring market were hardly the daring venturers in financial space envisioned by so many, but the same old Milquetoasts of old. 

But now a word or two about the benefits of passivity: 

“One implication of our results is that the typical household may behave in similarly languid fashion if market returns over the current decade drop below their historical average,” Tracy and Schneider said. 

“In that event, the average household equity share is likely to fall, but by less than it would if households were racing for the exits.” In that sense, languidness serves as a stabilizer, an antidote to volatility. 

John Cunniff is a business analysts for The Associated Press