LIPPER SENIOR RESEARCH ANALYST DON CASSIDY ON KTLK AM-760

Thursday, January 24

A. Right, yesterday. And that of course rounds out the picture for all of2001.

Q. Briefly, then, what happened in December?

A. Investors were as tight with their investment purses in December asthey were at the retailers! Stock funds took in a tiny sub-$2 billion(actually 1.7); bond funds had a razor-thin OUTflow of 0.9; and thesurprise was that there was an actual OUTflow of about $28 billion from theever-volatile money funds. So on a net basis we had an outflow month forfunds combined.

Q. It sounds like funds investors nearly "shut down."

A. You could say that. Clearly there was some tax-loss selling in thedisappointing performers like technology funds ($1.2 billion outflow inDec.) and people have learned not to buy a fund in December until thedistribution gets paid. But it looked like general lack of excitement asthe rally in stocks basically curved over to just about flat.

Q. You mentioned now having the overall numbers for all of 2001. What dothey look like?

A.

Estimated Net Flows by Major Fund Types
	($Billions)
	2001	2000
Equity	+33.6	+270
Bond	75.6	-51
Money Market	+325.3	+157
Total	+434.5	+376

Q. A lot of numbers there. Can you put them into some context?

A. Sure: IF every man, woman, and child in the USA had been in the fundsarena, on average they would have put in a net of $1,500 or so in 2001.The record was $475 billion back in 1998, or about $1,650 per person. In2001 they put 75% of new net money into money funds, whereas even in thetough market of 2000 they put about 72% into stock funds. The flow intomoney funds was a record for any year. Equity funds' net flows are thelowest since 1990 ? not coincidentally another bear-market year. Thebond-fund inflow is the highest since 1986, when interest rates were a lothigher than recently. The Y-2001 FLOWs were over 2:1 in favor of bondfunds over equity funds, but the existing assets of the stock funds areabout 4:1 the other way, so people were REALLY getting defensive andchanging allocations.

Q. Sounds like a pretty natural response to all the pain in the stockmarket...

A. It IS natural, but unfortunately it is very counter-productive. Peoplewere shoveling money into funds in late 1999 and early 2000, at what we nowknow was a top, and they pulled it out in 5 months of 12 in 2001, andpulled out the most in March and September, when the lows were reached.Exactly buy-HIGH, sell-LOW.

Q. How can people overcome this "natural" tendency?

A. It is not easy. It is a matter of discipline. We all KNOW we want tobuy low and sell high, because the numbers work a lot better that way. Butthe emotional overcomes the rational/intellectual unless we work very hardat it.

Q. How do you suggest that people DO that work?

A. Well, the best tool is imposing automatic discipline by regularcontributions to their IRA, 401(k) or 403(b) etc, right off the top ofevery paycheck. You get the benefits of dollar-cost averaging that way.Do it in a MIX of stocks and bond funds, and don't let yourself EVER quit.Temptation to quit, or change the mix toward much more cautious, comes atthe bottom.

The second thing is, when you are about to make a decision, ask if thatdecision is moving you towards comfort (or away from DIScomfort). Movingtowards emotional comfort in investing means buying high and selling low,and it produces financial DISCOMFORT in the long run (you're a lot poorer).You always need to grit your teeth and do what seems NOT obvious and easy.Selling during the mania and buying in the panics like last September.Never easy, but always most profitable.

Q. Tie this back to what people did in 2000/2001.

A. In 2000, they hung in pretty nicely, still buying into the decline forthe first several months. But in 2001 they threw in the towel, couldn'tstand it any longer. Capitulation to the wrong side always comes late, notearly. This past year people bought bond funds as an escape from stockfunds. They nearly bought no stock funds at all (about $10 a month perperson!), after shoveling in about $1,000 a person for the year in 2000,mostly early in the year, when stocks were fun and sky high.

Q. Why do people make the same mistakes?

A. They project that past trends will continue forever, and they succumbto too much fear at bottoms and too much hope or greed at the tops. Thesolution is to hold a steady course and don't watch, or deliberately dowhat feels counter-intuitive at the time.

Q. How are people doing in 2002?

A. Early partial data suggest not so well... small outflows during a downmonth in the market. Lets' hope our B4B friends are in the SMARTER zone!#

Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).