Mutual Fund Flow a Market Guide

One of the ways to tell if you should be buying stocks or not is to look at inflows to mutual funds. In the chart below, you can see a strong pattern.

The public poured money into mutual funds at the top of the market in 2000. Last year, they withdrew funds. They were over-invested in the years after the peak and now they are under invested. Stocks will be much higher before a switch in public sentiment brings the masses back to the market at higher prices.

Comments

[Hans111:]

La La Land valuations:
US market capitalization presently 15 trillion dollars
seekingalpha.com/artic...

15 Trillions:
did you ever think that 15 trillions is 50'000$ for each of 300 million Americans, toddlers unemployed etc everyone included.

So 50'000 just in stock? not counting equity in houses etc?

Doesn't this seem to be an UNLIKELY valuation?
Where is all this money? Virtual?

Sep 21 05:54 PM

[untrusting ...:]

Money flowing into mutual funds is 10-1 in favor of bond funds at this point. There is ZERO confidence in this stock market rally. The main reasons for the uptrend in stocks are: declining dollar, ultra low interest rates, massive Fed liquidity and QE, massive buying support by GS/JPM/HFT'ers (50-70% of volume). As soon as any of these conditions are reversed ... stock prices probably will seriously sell-off yet again.

Sep 21 11:35 PM

[CLH:]

This is why I love the market. When the market is low (now) investors sell and when its high (2007) investors buy. Go against the average investor and you will be rich.

Sep 22 06:59 PM

[BucketofOnions:]

Most mutual funds offered by reputable fund companies or families have good intentions. It's in their best interest to perform well and beat their benchmarks. Others make a token effort to perform, and are more concerned with making big profits for the fund company. Here's how the business works, and how to separate the good from the bad.

Professional money managers make the investment decisions in actively managed mutual funds. Only in index funds is performance a given, because they are passively managed to simply track an index. The vast majority of traditional mutual funds are actively managed.

Simply put, it is fund management's job to outperform the market in general, and to beat the competition. If a manger excels at his job, everyone benefits. The manager gets a raise for outstanding performance. The fund company benefits as investors pour more money into the fund because it has proven itself to be a winner. Investors benefit directly as their money grows.

That's how a good mutual fund operates. All funds make their money from the yearly expenses they charge investors. The more money they have under management, the more profit they make for the mutual fund company.

For example, if a fund grows from $1 billion in assets under management to $2 billion and charges investors 1% a year, it basically doubles its income. Much of this goes to the bottom line, since expenses do not increase proportionately.

Now, here's a thought for you. In the past 30 or so years, mutual fund assets under management have grown like crazy. Yet, many stock funds are charging investors 2% and more for yearly expenses while others charge less than 1%.

Why would a large mutual fund company need to charge investors 2% or more? What's the objective here, and whose side are they on?

There is one sure way I know of to separate the good guys from those who are looking out for themselves. Every mutual fund has an EXPENSE RATIO, and it tells the investor how much it costs a year to be invested in the fund. Plus, information is available that compares a fund's expense ratio to other similar funds.

Do not believe for one minute that you get what you pay for. High expenses come out of investors' pockets, and act to directly lower investment returns. No mutual fund can guarantee good performance, but it would be nice to know that your fund is on your side and doing the best it can for you as an investor.

Sep 27 11:50 PM