Passive investors and a moving market

During the 1990s, the US stock market rewarded investors with an average annual return of 16.1 percent, almost twice the historical average. Many assume that a nation of zealous investors piled into the market, eager to join the party.

Partly true. But it's a minor part of the story, according to Joseph Tracy and Henry Schneider, two economists at the Federal Reserve Bank of New York. The most important reason the value of stocks owned by households rose from $2.6 trillion to $12.6 trillion in the decade is that existing investors just sat there and enjoyed the ride up.

"The typical American investor was largely the passive beneficiary of a bull market," they write in a new "Current Issues" paper.

The two speculate that should market returns fall below average this decade, most investors will again behave in the same languid fashion and not race to exit the market. In that event, the current 11.6 percent share of stocks in a typical household's total assets, that may include real estate, bank accounts, etc., will fall - but only modestly.

(c) Copyright 2001. The Christian Science Monitor