One of the greatest benefits of a financial plan is it provides a clear signal in a world full of noise.
This is particularly true in times of market volatility. A bumpy ride can bring emotion into the mix – and that can be harmful to your investment judgement.
If recent data are any indication, and I believe they are, emotion has been getting the better of some investors.
Go the Flows
Our firm regularly monitors mutual fund capital flows, like in the chart below. It helps us gain insight into investor psychology, especially on the retail side. And over time, we’ve seen an interesting pattern emerge in the retail sector.
In the past decade, retail investors (“the little guys”) have not been following “the smart money” (institutional investors). And they’ve suffered for it.
According to the Investment Company Institute, a financial industry trade association, investors liquidated a net $783 billion from equity funds and added $1.4 trillion to bond funds during the period lasting December 2008-November 2018. Just three years in that time frame had positive net inflows (2009, 2013, 2014) into the equity markets.
This is important because there was a significant disparity between the fund flows and the returns on stocks and bonds.
During that time, the Standard & Poor’s 500 (S&P 500) posted a cumulative return of 277.08 percent. The ICE BofAML U.S. Corporate Index, a bond index measuring U.S. corporate bonds, returned 78.03 percent, while the 7-10 Year U.S. Treasury Index gained 30.29 percent.
Overall returns were great, and stocks were phenomenal.
But retail investor returns trailed significantly.
We think it’s because investors were driven by negative news and fear-driven politics. In other words, noise. And as a result, they made poor investment decisions.
Had they stuck with a plan and stayed invested in their equity allocations, they would have been rewarded. But fund flows show us that retail investors aren’t sticking with the plan.
History Repeats
From 1998-2008, the situation was flipped, when more retail investor money went to stock funds ($952 billion) than bond funds ($418 million).
But the outcome was the same – the retail investor and “the smart money” varied greatly.
The S&P 500 cumulative total return was -13 percent, while the ICE BofAML U.S. Corporate Index and 7-10 Year U.S. Treasury Index cumulative returns were 54.74 percent and 93.09 percent, respectively.
Retail investors reacted to noise, while institutional investors stuck to the plan and the fundamentals.
To improve in the future, retail investors should start ignoring the news and focus on time in the market, not timing the market.
Securities offered and sold through CoreCap Investments, Inc., a registered broker/dealer and member FINRA/SIPC. Advisory services offered through CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial Services and CoreCap are separate and unaffiliated entities.