90 Million Emotions Wreak Havoc
With the market in a correction and off 10% this quarter, emotions are running high. I want you to take a minute this weekend and get your bearings. Clear your head of the emotions that hinder sound analysis and get yourself on the road to the investment success you deserve.
A lesson worth remembering is that, without fail, investors tend to miss out on the market’s biggest gains, getting sucked in when the big money has already been made, and suffering from its biggest losses. I know this from studying money flows, and in part thanks to the 2010 edition of the Investment Company Institute’s (ICI) annual fact book. This year marks the book’s 50th anniversary, making it one of the most trusted authorities on what’s happening in the mutual fund industry today. Since 44% of households in America, or 90 million people, own funds, the report is also a good illustration of what’s happening to the individual investor.
To get an idea of how devastating this volatile market has been to individual investors, look no further than the net flow of funds for equities, illustrated by the bar lines in the chart below. First, look at the tech crash from 2000–2002 and how investors continued to pour money into funds long after the crash. Then, as the market began to recover in 2003, fund owners were net sellers, getting in only after the early gains were missed.
In 2008, investors didn’t miss the damage inflicted by the financial crash. They were too late as they withdrew a net $234 billion and continued to withdraw at a slower pace in 2009 with a net outflow of $44 billion. Between the two years, that’s around $275 billion that suffered most of the losses and then missed the boat when U.S. stock prices began their biggest post-WWII bull market gain of 65% (S&P 500) in only 10 months.
Today, I urge you not to let your emotions get in the way and instead to make sure you have the right mix of bonds, stocks, gold, and foreign currencies. Stick with your plan and avoid making emotion-driven decisions.