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90 Million Emotions Wreak Havoc

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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.

Net Flows to Equity Funds Related to Global Stock Price Performance

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.

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.