Follow the Money | Just Be Careful Where You Go

When there is a truth to be discovered, a common refrain is, ”follow the money.” Mike tells us what people really believe. You may think the Dodgers will win the World Series. Really? Are you willing to bet on it?" Put your money where your mouth is," is a common retort I heard when someone brags about what they can do. As any detective will tell you, this is true with a crime. Who made the money? A trail of money often leads to the truth.

The same can be said about the financial markets. The movement of money reveals the level of conviction an investor feels. The movement of money tells us what people think. Money. Money. Money.

A common believe regarding small investors is that they are not very good with their money. Most small (retail) investors buy stocks through mutual funds, whereas institutional investors (large pension funds, hedge funds, etc…) typically buy the individual securities.

In fact, the investment company Institute (ICI) measures the net flows into stock and bond mutual funds and exchange traded funds (ETFs) to measure a small investor convection. We all know the name of the game is to buy low and sell high. The track record for individual investors shows a propensity to do just the opposite.

Net inflows to mutual funds by month never exceeded $30 billion until the year 2000. The first four months of the year Saul the following positive inflows:

January $44.5 billion

February $55.6 billion

March $39.9 billion

April $35.3 billion

The S&P 500 topped out in March 2000 and declined over 45% over the next 32 months. How about when the stock market crashed in October 1987? It took 18 months for the market to recover to its pre-cash level. Stock mutual funds were in net liquidation for 16 of those 18 months.

How about today’s stock market?

The board has been charging for 10+ years. The S&P 500 returned 33.07% last year. Would you believe the stock mutual funds actually experienced net redemption and 2018 and 2019? The total net contributions (adjusted for ETF flows) were -199,480,000,000 in 2019 and 47,271,000,000 in 2018 after a positive flow of 186,565,000,000 in 2017. Bonds on the other hand have seen tremendous flows. Bond flows during the same period are 380,782 (2017), 100,433 (2018), and 458,528 (2019.) Considering the current rate on a 10 year US treasury is 1.6%. I don’t think the risk is worth it.

Normally, after a 10+ year long bull market I would be very concerned about future prospects. As we all know, what goes up eventually comes down. However, if the past serves as a guide to the future, bonds may be due for a pullback and stocks may still have room to run.