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o4cr -

What you say does make sense, and I think an investor who can see the underlying long-term trend of supply/demand can do well to improve returns. Recall that in the early 80s, no one wanted to touch stocks regardless of what now look like ridiculously low valuations. As the 80s progressed, stock ownership changed from a mostly institutional basis with relatively few individuals involved, to a large individual participation rate through mutual funds that, as you correctly point out, had little choice but to invest the money that poured in.

I have not seen direct charts of 401(k) money versus stock indices, but there is some anecdotal evidence that supports your claim. I heard that 401(k) participation and inflows fell during 2001, the first year in a very long time.

However, I've also seen studies that suggest that a lot of 401(k) money is invested in money market and other short-term income funds. During the bubble, this was touted as a reason why 401(k) investors were dumb - because they didn't participate in the stock boom. Now, these guys have the last laugh - at least for now.

Another supply/demand area I've been interested in quite a bit involves demographics. If people buy stocks to prepare for retirement and then sells them to finance retirement, then if a major portion of the population is entering retirement, one can expect that a major underpinning of market demand will go away or turn negative. In terms of lifecycle economics, this will mean that as a person in my early 30s, a relatively small demographic, stock prices may be depressed for much of my lifetime, but may come back as the larger demographics below me start to near retirement age. The key for me, therefore, may be to live relatively frugally until my 70s, at which point a big-picture upturn may be well-established.

I think you can always count on new financial products coming out, due in part to the ever-complex tax code. I doubt the 401(k) is the only innovation we will see in our lifetimes.

Thanks for the input.

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