“The Dow Jones Industrial Average is down 25% from its high, but it still has more than tripled since the start of the last bull market, which began in October 1990. And even though the Nasdaq Composite Index has fallen 70%, it is up 355% in that period,” writes Ken Brown in today’s Wall Street Journal.

“So, despite the recent market turmoil, investors can at least take comfort in the big profits they racked up in the 1990s. Right?”

“Not so fast. By one measure, most investor profits in the past decade have been wiped out. That is because so much of investors’ money actually was invested in the market shortly before its peak last year. And the disappearance of those profits now raises disturbing questions about how investors will react when they realize how little they are now ahead.”

” ‘If you’re playing with the house’s money, you tend to be a little more reckless with the money, but when you cross that line to zero and you’re playing with your own cash, everything changes,’ says James Bianco, president of Bianco Research LLC, a Barrington, Ill., investment-research firm. ‘That’s why the public has been so calm and so cool, because all they’ve been losing is unrealized profit. Now we’re getting dangerously close to the zero number.’ “

“Mr. Bianco has tracked mutual-fund investor profits for more than a decade, and until now has argued, correctly, that small investors would stick with their funds because they hadn’t lost their original investment. But ‘if the market stays down here, then I think you’re going to start to see attitudes change, and you might see more consistent outflows from mutual funds,’ he says.”

“Others believe that investors may be so convinced that they have got to stay invested in stocks to make money in the long term that they will conclude that selling their mutual funds is more dangerous than holding them.”

“But their behavior may be hard to predict, because the recent stock market decline is different from the ones that have preceded it. ‘One time we had a big profit, my wife said, “Sell, let’s cash out,” ‘ says Daniel Shapiro, a lawyer in Montclair, N.J. ‘We didn’t, and here we are today with a lot less money.’ “

“The profits have been disappearing steadily since March 2000, but the pace has accelerated recently. In December 1999, for example, investors had $753 billion in unrealized profits in their stock funds, according to Mr. Bianco, who began tracking the data in October 1990, which is generally considered the start of the last bull market. This past July, the profit figure had fallen to $542 billion. At the end of August, it was $452 billion, and today it stands at approximately $199 billion.”

“How can that be possible after the greatest bull market in history? Simple. Back in October 1990, when the Dow industrials were at 2400, investors bought $684 million worth of U.S.-stock mutual funds, while in January 2000, with the Dow industrials at 11750, they dumped $31.3 billion into the funds.”