Small investors show grace under pressure. (Forward Observer).(social security reform)(Brief Article)

During the 1990s stock-market boom, opponents of Social Security reform repeatedly warned of a day when share prices would decline, and the allure of personally owned and managed retirement accounts would vanish. Americans would become grateful for a government program that provided them with a guaranteed pension--even if it's a small one.

Well, the day has come. Last year, for the first time in a decade, the benchmark Standard & Poor's 500 Stock Index fell. A $100,000 nest egg invested conservatively in a broadly diversified portfolio of stocks at the start of 2000 was, 23 months later, worth just $78,000. A similar investment in the tech-heavy Nasdaq Composite Index was worth only $47,000.

It's been an ugly bear market. Most workers with a 401 (k) plan--the tax-favored retirement account owned by roughly two out of five working families--have recently seen a depletion of their assets. After the destruction of the World Trade Center the markets shut down for six days. During the first week they were reopened, the S&P fell 11 percent.

So the stock market of 2000 and 2001 provides a real-life test of the theory espoused by foes of Social Security reform. And it's a test Americans have passed with excellent grades.

The best way to gauge the response of small investors to the stock-market decline is to examine the flow of cash out of and into mutual funds that primarily own stocks. According to the Investment Company Institute (ICI), for the full year 2000 Americans withdrew about $800 billion from stock funds and added nearly $1.1 trillion: a record-setting net inflow of $274 billion. And, remember, stocks fell 9 percent overall that year. For the first nine months of 2001 (a period that includes the terror attacks), the net inflow of cash into stock funds was $13 billion--small, but still positive. This happened even though the market was, at that point, down 18 percent for the year.

The Wall Street Journal showed its admiration in an article on October 22 headlined, "Once Again, Small Investors Stay Put When Stock Prices Declined." Individual investors have emerged, wrote E. S. Browning, as "the market's stalwarts" Trading in small blocks (100 shares or fewer) actually declined by one-third on the first day of trading after the attack, as small investors sat tight. Institutional investors, by contrast, rushed for the exits when the market reopened, with trading in large blocks of shares (10,000 or more) jumping in volume from an average of 600 million to 1.6 billion shares.

Small investors were not oblivious to the economic threat raised by ...