Investor Behavior – Fourth Quarter, 2011

Timing the market. There is no secret that average investors often do things at the wrong time, while trying to outsmart the market. The Investment Company Institute (ICI) compiles data about mutual fund investing showing cash flows into and out of various types of funds. This data can be illuminating.
In September 2011, the stock markets tanked – the S&P 500 was down over 7% while the Russell 2000 (small capitalization stocks) was down over 11%. In October, the ICI shows that stock mutual funds experienced huge amounts of withdrawals (just over 26% of average net assets) leading to net outflows of cash for the month. Bond funds on the other hand saw the opposite – positive cash flows. In October, however, the stock markets soared. The S&P 500 and the Russell were both up over 10% while the Barclays Aggregate Bond Index was flat.
Obviously, investors panicked after September and pulled money out of stocks and put it in the safety of bonds. The problem is that they missed the recovery in October. In fact, money has been pouring out of stock funds since May. The numbers ramp up significantly last summer as the US Debt Ceiling debate and the troubles in Europe raged on. And as mentioned above, as the last quarter began – on the heel of a really bad month in stocks – the outflow levels rose again. This shows that investors were driven by fear. There is plenty of data that shows if you miss the best months for stocks, in the long term, it hurts the return on your portfolio. The annualized average return for the S&P 500 for the last 20 years (ending 12/31/2011) is 7.8% versus 6.5% for the Barclays Aggregate Bond Index. And, since 1926, the average return on the S&P 500 is 9.8%. Clearly, staying calm, cool and collected pays off. Trying to be smarter than the market or letting panic run your portfolio doesn’t work in your favor.
We can provide you with a calming and reassuring voice during the chaos of a turbulent market. Please don’t hesitate to call us when you need some help.