individuals’ fund buying patterns over the past four years
Perhaps the one constant in the behavior of individual investors in the US during the recession and subsequent bounceback has been their fervent embrace of bonds and equally ardent shunning of stocks. Within that overall orientation, it’s clear that individuals have preferred taxable bonds to municipal ones and foreign stocks to their domestic counterparts.
True, there were several months of pure panic after the Lehman collapse in September 2008. At the fund-flow nadir, in October of that year, individuals withdrew over $128 billion from mutual funds and put the money into federally-insured bank deposits. Less than a third of that amount, however, came from bond funds.
during the bull market
By June of 2009, investors were settling into the pattern that has marked their behavior through most of the entire spectacular rise in stocks of the past two years: net investment of around $40 billion each month, $30 billion of that into bond funds, the rest into stocks–virtually all the equity money going into foreign securities.
As 2010 was coming to an end, two significant departures from this norm emerged:
1. As the big problems state and local governments are having with their finances became better known, individuals started a steady stream of withdrawals from tax-free bond funds, and reinvestment of that money in taxable fixed income. That continues. to the present.
2. January and February 2011 saw $32+ billion of new purchases of stock funds, the largest allocation of money to equities since early 2007. At the same time, investors, quite uncharacteristically, put the lion’s share of their equity money into domestic securities.
At the time, I remember asking myself how to interpret the fact that an investor class that happily watched a near-doubling of stocks without showing a flicker of interest suddenly started piling in–and in a big way.
In this case, would it be unfair to characterize individuals as the “dumb money”? …no. Was it a good sign that they’re beginning to buy? …not at all, since having the last bear capitulate is usually a sign of the top. On the other hand, US stocks were still cheap then, in my view. (For what it’s worth, I think they remain so.) My conclusion was to worry a little more, but not alter my pro-cyclical portfolio stance.
the past two months
In this context, the most recent data on individual investor actions from the Investment Company Institute are very interesting:
–municipal bond withdrawals continue
–taxable bond funds are receiving net additions of $3+ billion weekly
–money flowed out of equities in March, although April has seen modest inflows resume
–investor preference for foreign equities has returned. In five of the past eight weeks, money has been withdrawn from domestic funds. More than 100% of the net new equity money stock funds have received in March and April has gone to non-US funds.
In other words, we’re back to the pattern of equity avoidance that has characterized individual behavior during the best of the bull market. Interestingly, the S&P has continued to go up in March-April, although at a more sedate pace than during January-February.
what to make of this
Theory says that as people get older and richer they become more risk-averse. I think that’s true. What I don’t get is why individuals, who are usually a shrewd lot, think at today’s prices and in today’s economic circumstances that bonds are a low-risk investment.
Exhibiting the perverse mindset that characterizes much of Wall Street’s thinking, I’m kind of relieved that individuals have lost interest in stocks. That probably means that the S&P 500 still has legs.