America boasts the world's largest mutual fund market—just shy of $10 trillion at the end of 2008, representing over half of all mutual fund assets worldwide according to the Investment Company Institute (ICI). And that money is always in flux, flowing in and out of various funds throughout the year in a perpetual investor shuffle.
Tracking mutual fund asset flows offers some interesting insights. Morningstar recently published their 2009 mutual fund asset flow report. Here's what made my highlight reel (you can view the entire report here if you like).
Net of inflows and outflows in 2009:
- Investors placed $377 billion in US mutual funds
- Of that amount, $357 billion (roughly 94%) went to bond funds
- US stock funds suffered net outflows of $26 billion
Morningstar's report reminded me how important it is for long-term investors (or any investor) to remain disciplined. 2009 was a great year for stocks, with the S&P 500 up over 26% (the index jumped over 60% from its March 9th low through yearend). Yet US stock fund investors couldn't dump their shares fast enough. Morningstar's data suggest many of those investors swapped to bond funds. Save for US Treasuries, bonds were positive in 2009, but nowhere near stocks' returns.
In addition, and more importantly, did all those investors truly need a major allocation switch last year? Or is it safe to assume a few (perhaps more than a few) simply booked a fear-induced flight to less-volatile assets? Given my experience over the years, I'm betting the latter. Unfortunately, many who dumped their stock funds last year may have locked in the worst of the bear and missed out on returns that could have bolstered efforts to reach long-term objectives.
The data from Morningstar and ICI show that many investors struggle with decisions requiring discipline—especially during volatile markets (up and down). Even when presented with solid evidence that such action could be harmful, otherwise rational folks abandon long-term strategies at the first sign of underperformance or market trouble, and without second thought. Undisciplined investors will often chase investment returns that appear more attractive than their current investments. They'll do so to either avoid market downside or capture upside. But by virtue of chasing returns, the undisciplined rarely catch what they chase.
Indeed, it's tough to be invested and not worry when markets gyrate. Sticking with a long-term strategy isn't always comfortable—it can be terribly frightening at times. Short-term market volatility is like a drug to investors with little or no discipline, inducing knee-jerk reactions to buy or sell, often at the worst possible times. Lots of professionals struggle with it, let alone individuals. Chasing returns may make you feel comfortable or exhilarated, but it often proves more harmful than helpful in the long run. Investors who adhere to a carefully planned long-term strategy generally experience better returns over time than investors who make frequent strategy changes.
I'm not implying you should never adjust your portfolio—active management has its benefits over a completely passive approach. But for the most part, major strategy changes (e.g., stocks to bonds or bonds to stocks) should only take place if there's a bona fide change in your financial situation, overall investment objectives, or fundamental market conditions—not just in reaction to volatility.
Though perhaps not as exciting, the truly worthy chase for most investors is one that spans many years to reach established long-term goals. Success is often achieved from having the discipline to stick with an appropriate strategy. If, for whatever reason, you find yourself second-guessing your otherwise carefully planned long-term strategy, perhaps tempted to chase the "must have" strategy everyone else is talking about, remember to be disciplined—don't just go with the flow. While you may enjoy the thrill of the chase, your portfolio likely won't.