If you ever wondered if the “herd” of U.S. investors is moving in the right or wrong direction, here is some interesting food for thought: According to Morningstar, investors poured just over $19 billion into bond funds in the month of August, compared to a net withdrawal of $1.4 billion from U.S. stock-based funds. On July 31, 2018, the 10-year Treasury note closed with a yield of 2.96%. Today it’s 3.21%. And as most of our readers know, if yields rise, that means the price of the underlying notes had to fall. This much shift is a painful move for fixed income investors over a very short period of time. That means a potentially large principal loss for someone hoping to move from “risky stocks” to “conservative bonds.”
For the previous year, flows into mutual funds and exchange-traded funds have told a similar story: $293.2 billion went into bond funds, while just $4.5 billion found its way into U.S. equities. These “risk reduction” moves may have turned out to not reduce much risk after all.
“Herd mentality” is frequently wrong, as the chart below illustrates. While simply being a contrarian is not always the best investment strategy, taking all your money out at the bottom of the market (e.g. the 2008 “Great Recession”) and during 2015-2018 while the S&P 500 index has continued to rise, could have lead to financial “suicide.”
In the end, investing well is largely a financial planning problem. When you understand the source(s) of your current and future income, if these sources are steady and somewhat predictable, you become less reactive to the short term “noise” of market volatility. Most investors have faith in the market’s long term success, but are simply unable to reconcile this to their short term needs without the help of a well-thought-out financial plan - and a “coach” to help them stick to it.
That’s where we come in.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.