Consider the following insanity. Oft-repeated research from Dalbar Inc. finds that investors poured a record $309 billion into equity mutual funds at the top of the technology-driven market in 2000, purchasing at the highest possible price. At the same time, they pulled a record $50 billion from bond funds.
Conversely, investors put $140 billion into bond funds in 2002, while pulling $27 billion out of equity funds at the bottom of the market, selling at the lowest possible price. In both instances, irrational behavior led investors to do the exact opposite of what prudent investment required. Back then, there was time to recover before baby boomer retirement, but now it’s happening again…
As Wall Street Journal columnist Jason Zweig noted over the weekend, “The bond market is a bubble, and the little guy is blowing it.” (We love the double entendre.)
“Retail investors poured over $375 billion into bond mutual funds last year and another $230 billion thus far in 2010—even as interest rates have shriveled toward zero and the risk of future losses has risen,” Zweig writes. “Households also have yanked roughly $70 billion out of U.S. equity funds this year, though the stock market has gained 4%.”
But as much as an irrational client frustrates advisors,Zweig finds it’s a case of “physician, heal thyself.”