Financial Beat

By Bernice Napach, Senior Editor

Stocks
At the Nasdaq, small investors rule

When the Nasdaq takes a dive, don't blame the big Wall Street investment banks or brokerages. The individual investor is the more likely culprit. Individuals now account for more than 60 percent of the Nasdaq's daily trading volume, says Steve Galbraith, an analyst at Sanford C. Bernstein & Co., a New York investment management and research firm. "The individual investor is no longer the tail wagging the [market] dog; he is the dog."

Individual investors are the force behind the enormous explosion in stock market turnover. For the first two months of this year, turnover jumped to almost 400 percent on the Nasdaq and 100 percent on the New York Stock Exchange, says Galbraith. The typical Nasdaq stock is now held for only 95 days, down from almost 140 days last year, while the typical NYSE share is held for about a year, down from 1 ¹/₄ years.

Individuals are also becoming key players in the market for initial public offerings. They're the most active buyers of IPOs on the first trading day, accounting for much of the large opening-day price run-ups, and the most committed owners of these stocks. One year later, individual investors still own almost 70 percent of these shares. (Institutional buyers hold the rest.) Borrowed money underpins much of this elevated trading activity, and individual investors now account for more than half of this borrowing, or margin debt.

Cars
Are aftermarket repair parts really dangerous?

For cosmetic repairs at least, aftermarket replacement parts are just as safe as the original manufacturer's, according to a study by the Insurance Institute for Highway Safety. It should be noted, however, that auto insurers fund the institute, and these findings are advantageous to the auto insurance industry, since aftermarket parts are less expensive than parts from the carmaker.

Until recently, insurance companies typically directed repair shops to use aftermarket cosmetic parts. Some companies have temporarily suspended that practice following a court ruling that required State Farm to pay more than $1 billion last year for defrauding policyholders with such repair practices. That decision is being appealed.

To prove the safety of aftermarket replacement parts, the insurance institute crash-tested a 1997 Toyota Camry with a replacement hood manufactured by a certified aftermarket supplier. The result: After a crash at 40 miles per hour, this Camry performed as well as one with its original hood intact, and better than many other midsize cars sporting their original hoods.

"Claims that aftermarket cosmetic parts could compromise safety are red herrings to try to frighten people," concludes Brian O'Neill, president of the insurance institute.

Telephones
Washington wants less deception
from those 10-10 long-distance services

Be careful if you dial 10-10 plus three other digits before placing a long-distance call. These so-called "dial-around" services, which let you bypass your regular long-distance carrier, often charge hidden fees, including steep minimums for brief calls. Many require that you sign up for their service as a secondary provider in order to qualify for their lowest rates. Some also change rates frequently.

Before you sign up or make the call, ask the dial-around's customer service department for the lowdown on its rates, advises the Federal Communications Commission. While you're at it, ask who owns the service. AT&T owns Lucky Dog, which uses the 10-10-345 prefix; MCI WorldCom owns 10-10-321 and 10-10-220; and Excel, the fourth largest long-distance carrier, owns Telco Communications Group, which is the proprietor of 10-10-297 and 10-10-399.

The FCC and the Federal Trade Commission recently issued a joint policy statement intended to end misleading advertising by dial-around and other long-distance services. "Dial-around services are unique in that consumers typically incur charges for using them before receiving any information other than what is conveyed in the service's advertising," the agencies noted.

The agencies want clear and conspicuous disclosure of any limitations on the availability of advertised rates. These include promotional teaser rates that end after a certain date, reduced per-minute rates that are available during limited hours only, and any geographic restrictions—such as higher rates for in-state calls.

Did you know that. . .

• The Social Security trust funds, which provide retirement, survivors, and disability benefits, are now expected to remain solvent until 2037? That's three years longer than projected last year. But at that point, assuming nothing changes, the funds will pay out only about 72 percent of benefits.  

• Taxpayers filed nearly 29.8 million federal returns by computer this past tax season, exceeding the 23.4 million total for all of last year? Phone filings, however, fell about 9 percent from last year.  

• Performance is the primary contributor to the growth in mutual fund assets? Last year, performance accounted for close to 80 percent of stock-fund growth; net new investment by shareholders (new purchases minus redemptions) was responsible for only 20 percent.  

• In more than half the households owning mutual funds, males and females share the investment decision-making? Among the remaining households, the sole decision maker is almost as likely to be female as male.

• The number of municipal-and government-bond funds has declined steadily since the mid­1990s? Investors have continued to shun bonds in favor of stocks. As of year-end 1999, bond funds accounted for about 12 percent of all mutual fund assets; stocks funds, 59 percent; and money-market funds, 24 percent. The remaining 5 percent were hybrid funds, which buy stocks and bonds.  

• The latest available statistics (which are for the 1997 tax year) show that 1.8 million returns reported adjusted gross incomes of $200,000 or more—19 percent more than the previous year?

Retirement Plans
The new look of 401(k) plans

The typical 401(k) plan now offers nine investment options, matches a portion of employee contributions, and provides daily valuations of fund balances. All three benefits were enhanced last year, according to a recent survey from Hewitt Associates, a Lincolnshire, IL, human-resource consulting firm. In 1997, when Hewitt did its previous biennial survey, the typical 401(k) offered just seven investment options.

In 1999, the average 401(k) also let employees contribute a maximum 15 percent of their pre-tax salary, transfer balances between funds on a daily basis, and borrow from their account. The increased number of benefits, combined with more efforts to educate employees about investing, seems to have paid off. Seventy-eight percent of eligible employees participated in 401(k) plans in 1999, contributing an average 6.7 percent of their salary.

The table below shows the most common investment options offered by 401(k) plans and how they've changed over the years. Large-cap equity funds (including index funds) and foreign equity funds have become more popular, while balanced funds have lost some appeal and money-market funds have stagnated. The pie chart illustrates how employees choose among these options when allocating retirement assets.

 

Bernice Napach. Financial Beat. Medical Economics 2000;10:19.