From record inflows to record outflows: how do you decide? In the weeks just ended, the investment industry is reporting that record amounts of money has flowed out of U.S. equity based investments into fixed income investments. January results in the U.S. equity markets were not good, while fixed income investment performed admirably as rates began falling just after New Year’s Day.
From record inflows to record outflows: how do you decide?
In the weeks just ended, the investment industry is reporting that record amounts of money has flowed out of U.S. equity based investments into fixed income investments. January results in the U.S. equity markets were not good, while fixed income investment performed admirably as rates began falling just after New Year’s Day.
To me, this is living proof that the average investor makes their investment decisions based on the headlines and the hot news. It was just last year that the news reported record inflows into equity based investment products. With these record inflows last year, most were way too late to the rising market party, and bought their investments at record high levels only to be shaken as the new year brought changing sentiment; at least in the short term.
As far as the weak January goes, it was long overdue. Equity markets frequently have corrections or price declines of 10 percent of more every two to three years. But in this “give me the information now” internet society where we reside, investors are doing the same stupid things that they’ve done for decades, except more frequently. Historically, it is common to see retail investors buy at market highs and then capitulate in times of weakness and sell at market lows. This is why you see surveys from companies such as Dalbar Inc. which show average investor performance significantly lagging the major indices over the long haul.
I am not suggesting that all investors should buy and hold forever, and ignore market weakness. But I am suggesting that there is more to markets than headlines and short term swings. Portfolios should be built in such a way that you know up front what kind of historical volatility that your allocations have delivered. Just about every index, holding or sector can be historically analyzed where you can understand just how good or bad that holding has performed under varying market conditions.
Take the S&P 500 index. Last year many investors benchmarked their portfolio’s to this large cap U. S. based index only to be disappointed if your holdings were made up of diverse sectors, sizes and markets. The comparison caused anxiety for some while more
mature investors understand that one year should not cause you to abandon your strategy or philosophy.
Your nest egg deserves more than intuition or watching the daily business news delivered by firms who care more about ratings than they do your investment outcomes. You need to start by understanding your desired outcome.
Start with a simple calculation to see what you need to earn. Then construct a portfolio with the best chance of reaching that objective with as little deviation as possible. When you get to this stage of maturity as an investor, you’ll realize that it doesn’t matter what historical information the news is reporting. The only thing that matters is whether you are earning enough to reach your promised land.
John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached firstname.lastname@example.org or on Facebook as JohnPNapolitano.