10 YEARS LATER ...
Recovering from Great Recession’s damages, investors have embraced new approaches
NEW YORK — A decade ago, as Lehman Brothers went bust and the fragile financial system was teetering, fund investors wondered how bad it could get.
The answer: pretty bad. The S&P 500 plunged 4.6 percent on Sept. 15, 2008, and would incur worse losses in the ensuing months.
Many investors bailed out. For those who held steady through all the tumult of the Great Recession, a decade later they’re sitting on more valuable portfolios.
Along the way, investors have changed not only what they invest in but how they do so. They have less faith in stock-picking fund managers who promise to protect them from downturns. They are seeking the lowest-cost options.
And they’ve largely played it safe, putting much more money into bond funds than stock funds.
Thanks in part to extraordinary efforts by the Federal Reserve and others to prop up markets, the largest mutual fund by assets, Vanguard’s Total Stock Market Index fund, has returned nearly 190 percent over the last decade. The numbers are similar, if not quite that high, for funds of all different types.
BONDS VS. STOCKS: Investors have been slowly warming up to stocks, putting nearly as many dollars into stock funds last year as they did in 2007. But they’re far more interested in bond funds, which drew three times as many dollars last year as they did a decade ago.
This year, investors have put over 10 times more dollars into bond funds than stock funds through July: $155.8 billion versus $14.8 billion.
Part of that is because the Baby Boomer generation is closer or further into retirement, which creates more demand for the income that bond funds provide.
But investors also are still hesitant to fully embrace the stock market. Bonds are safer investments than stocks, even though many bond funds are down this year due to a rise in interest rates.
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ACTIVE VS. INDEX: Before the Great Recession, stock-picking fund managers were big stars in the financial world. They helmed many of the largest mutual funds, and investors trusted them to pick the right stocks that would help them beat the market.
But many actively managed funds found themselves pulled down with the undertow of the financial crisis, as panicked markets punished stocks of all types, indiscriminately.
Many investors moved their dollars into funds that merely try to match the S&P 500 and other indexes, rather than try to beat them.