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As stocks drop, bonds returning to favor

Stocks remain the cornerstone of the American nest egg. But individual investors also are looking at more conservative investments to an extent not seen since the early to mid-'90s.

James Brownold is ready to buy bonds. Brownold, a 55-year-old New York resident who does voice-overs for television and radio commercials, is a cautious investor and already owns some municipal bonds in his retirement plan.

But after some ill-timed forays last fall into Yahoo and CMGI, two falling technology stars, he has stopped dabbling with his investment portfolio and is ready to add more bonds.

"Bonds, CDs, cash," he said, referring to his current and near-future investments. "I think, if things keep going down, what keeps its value?"

Stocks remain the cornerstone of the American nest egg. But individual investors are looking beyond stocks at more conservative investments to an extent not seen since the early to mid-'90s. Some of the money that last year might have gushed into stocks is now headed toward bonds, money market funds and other less volatile investments.

The change in attitude has followed the descent of most major stock market indexes into bear territory.

With the bear comes the bond. A year ago, the idea of buying a bond could have gotten a person laughed out of many a cocktail party. Bonds? The only investments worth bragging about, besides tech stocks, were options to buy more tech stocks.

Whether the change in sentiment is nearly complete and whether it is merely a temporary loss of faith in stocks is important, since that will help determine whether the stock market can stage a sustained comeback in the coming months.

"I want to continue to go more into bonds for the time being," said Thomas Bartkoski, 41, a consultant for a Chicago business development firm. Bartkoski has about 10 percent of his net worth in bonds, but decided over the past couple of years to double that. To speed up the process, he increased his 401(k) plan's allocation to bonds to a hefty 50 percent.

"The Nasdaq, with all its craziness, I was concerned with it," he recalls thinking at the time he started to change his strategy.

Still, it is easy to find investors who see the market implosion as a buying opportunity, and people often make Wall Street legends by being contrarian. Several prominent Wall Street bulls _ including Abby Joseph Cohen of Goldman, Sachs and key strategists at Morgan Stanley Dean Witter and Merrill Lynch _ see this as a time to buy stocks.

So does Gregory Mews, a 47-year-old assistant manager at a Milwaukee-area Walgreens store.

Mews did turn a bit cautious last year. He dumped Nortel and Lucent Technologies, two slumping telecommunications giants, and sold shares in EMC, a data storage company, which was the only technology stock in his individual retirement account.

"With one company after another coming out with earnings warnings, it seemed like time to bail," Mews said.

But this month, he could not resist falling prices any longer and scooped up EMC, as well as shares of Flextronics International, a maker of custom electronics. He rethought his decision last week, after absorbing the crumbling of the market.

Stocks have shown signs of resiliency this year, taking in $24.6-billion in net new money in January. But in that month more than $8 of every $10 invested in mutual funds went into perceived havens like bond and money market accounts. That is more than double the rate of a year earlier.

Projections for February show it could be the largest month of stock fund withdrawals in several years., a company that tracks money flows, estimated $13.4-billion in net withdrawals from stock funds in February, which would be the largest month of withdrawals ever. AMG Data Services, which tracks where investors put their money, forecasts a net withdrawal of $3.6-billion, which would still be one of the worst months of the last decade.

"Clearly, investors are pulling back and re-evaluating," said Robert Adler, president of AMG. "This reallocation has been going on over the last year and is now accelerating."

By contrast, bond funds took in $8.6-billion of net new money in January, according to the Investment Company Institute, a mutual-fund industry trade group. That was the highest month of sales in more than two years and a striking change from the $12.6-billion that poured out of bond funds in January 2000.

An even more popular choice has been pulling back from the market by investing in money market funds, which many investors see as a proxy for cash. Such funds have taken in $202-billion this year, through the first week of March, according to the ICI.

Along with directing their new savings to different places, some investors are reappraising the overall construction of their portfolios. The average 401(k) retirement account now has the largest portion in bonds and nonequity investments since 1994, according to the Spectrum Group, a Chicago consulting firm.

The average retirement account had 70 percent in stocks last fall, down from 80 percent in 1998 and closer to the 60 to 65 percent typically used by professional pension fund managers, who are more conservative than individual investors. Presumably, part of that shift can be explained by the falling values of stocks.

Lewis J. Altfest, a New York financial planner, said investors were no longer inclined to buy stocks even as they fell in anticipation of a quick rebound. "We're getting a realization that this isn't a buy-on-the-dips situation any longer," he said.

Altfest, 60, realized recently that events had come to a head when he attended a staff meeting at a university where he teaches a finance course. During the meeting, a fellow faculty member slipped him a note.

"What should I do with my technology holdings?" it read. Altfest said many of his clients are asking him the same question.

One of those clients, Brownold, had good luck buying shares of America Online and CMGI in 1999 and then selling them in April 2000. His luck turned sour, however, when he bought CMGI again last fall, as well as Yahoo. The stock of both companies has fallen more than 75 percent in the past six months.

"It worked the first time," Brownold said. "But you go back to the well a second time and the water isn't always as good."

Instead, he prefers municipal bonds, an old favorite.

Adler sees recent data as an indicator that investor behavior may have undergone considerable change. Investors last month withdrew a net $1.6-billion from technology sector funds, once a favorite, according to AMG. In the first five trading days of March, investors, driven by a minor rally, put $1.8-billion into stock funds. But money continued to be withdrawn from technology and health care funds.

Investors are still "willing to take risks," said Adler, but not the same kinds of risks, and "not toward technology."