Irrational Complacency

Posted in Money Matters on August 4, 2002

The following is “Irrational Complacency,” this week’s article by Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for the article text.

Irrational Complacency

by Al Thomas


According to Investor’s Business Daily newspaper 70% of those who own mutual funds in their 401Ks have not sold anything. Another 15% have sold between 1% and 10%. This amounts to billions of dollars in equity, but is a small percentage of the $3,300,000,000 (that’s a trillion) of mutual funds held by the public. It is about 20% to 50% smaller than it was 2 years ago because of the recent market decline– and getting smaller.


There are about 77,000,000 mutual fund owners and 80% of them have less than $50,000 in their account – and that figure is 2 years old. Who knows what it is today. Almost everyone I speak to has lost more than 20% and others as much as 70% to 90%.


What is scary is the thought that suddenly a huge number of those folks in the 401Ks and IRAs will decide to sell and it will be ‘Katie, bar the door’. What does a mutual fund manager do when he has multi-millions of dollars in redemptions? Of course, he must sell. And what does he sell? The most liquid stocks in his portfolio because those are the only ones he can find buyers for. He is keeping the dogs because he hopes they will go back up so he can get out “even”. Usually he must sell the so-called best quality and best known stocks like General Electric, Microsoft, Intel, Bank America, etc., etc.


We recently have had more than a 400-point down day and now followed by several 400+ days up. Smarter investors have been putting in stop-loss orders to sell them out if their stocks go lower rather than guess at where to sell. If you do happen to have stocks that are going up they too will be caught in this type of avalanche. There will be no place to hide. One of the indicators that professional traders look for panic is several days where the down volume is nine time times greater than the up volume and 9 out of 10 stocks decline that same day. This is the sign of a bottom, yet so far there have not been any days like this. The huge up-days are characteristic of bear market rallies so be very careful and don’t buy anything.


When a true bottom is formed after the losses we have sustained in the past 2 years it will take months if not years before the market again becomes a bull. Wait! You never have to be in a hurry to buy after a big market break as there are so many people waiting to sell that you have plenty of time. Technical analysts also look for what is called a ‘W’ formation where the market goes up and then come back to test the previous low with the right ‘leg’ being above the left leg. We have time for this to form. Wait!


Almost no one has sold. It is irrational to hold on to stocks and mutual funds that keep going down. Complacency is going to wipe out many years of savings.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.