Big Picture: What People Are Doing With Their Money

"After being burned in the stock market, my money is almost entirely in savings," Julie Moscove told CNNMoney on Tuesday.

Such anecdotes are fun for the media to write about, but as I've shown before, there's no evidence of investors fleeing the stock market in meaningful numbers. Despite some of the most volatile years in history, the vast majority of those invested before the financial crisis remain invested today.

But while investors haven't fled stocks, what they've done with spare cash this year is another story.

I combined data of mutual fund flows from the Investment Company Institute with ETF flows from the National Stock Exchange to get a feel for where investors' money has been going this year. Here's what it shows:

Category

Year-to-Date Flows

Stocks (domestic and global) $31.1 billion
Fixed income $87 billion
Hybrid $19.8 billion
Money market ($60 billion)

Sources: Investment Company Institute and National Stock Exchange.

Pretty clear: Lots of money coming out of money market funds, a little going into stocks, and a lot going into bonds. That's somewhat different from last year. For all of 2011, investors pulled $106 billion out of money market funds, yanked $66 billion out of stock mutual funds and ETFs, and added $171 billion to bond funds and ETFs.

What should you make of it?

For the first time in recent memory, money is flowing back into stocks. That's encouraging. But it's a trivial amount at best, especially considering investors on net haven't added anything to stocks -- which still trade at attractive prices -- in several years. Meanwhile, bonds are still getting most of investors' attention. With yields at all-time lows and many bonds promising negative real returns (after inflation), that doesn't inspire much confidence in the average investors' prospects.

When asked what the definition of "risk" is, Berkshire Hathaway (NYSE: BRK-B  ) vice-chairman Charlie Munger cited "the risk of inadequate return." BlackRock CEO Larry Fink made a similar point in an interview this week (emphasis mine):

If you're focusing on your retirement, the compounding effect to get to the proper nest egg is very important. If you're 35 or 45 years old and you're earning zero interest because you have it in cash, it gives you a deeper hole to build your nest egg in the future. If you're trying to build a nest egg for retirement, you have to ask yourself, can you afford the cost of earning zero, and what does that mean over the course of 30 years? And if your horizon is truly 30 years, why are you worried about daily volatility or the noise of oil prices and other daily ups and downs? If you believe that the world is going to be operating, and will be larger in 30 years, you'd better start focusing on the cost of earning zero in money. There is a big cost to earning zero interest on your money.

He's specifically referring to cash here, but earning "zero interest" applies to most bonds today once inflation is factored in, and it might pose the biggest threat to investors' portfolios. Day-to-day market volatility shouldn't keep you up at night. Not having enough money to retire should.

What do you do about it? The broad stock market has doubled over the last three years, marking one of the largest rallies in history. The big gains are behind us, folks. But there's still plenty of opportunity in stocks, especially -- especially -- when compared with the alternative of cash or fixed income. "The prospects for future returns in equities relative to bonds are as good as they have been in a generation," Goldman Sachs wrote this week in a research report.

Even after this year's run, the S&P 500 trades at 14 times this year's earnings. That's not cheap, but it's hardly dear, either. Investors buying at today's prices and holding for the long term should expect reasonable returns. An index fund selecting for high-quality companies -- I like Vanguard's Dividend Appreciation Fund (NYSE: VIG  ) -- will do even better. And both certainly offer higher returns than can be had in bonds.  

The opportunity gets more exciting when looking at individual names.

Berkshire Hathaway shares have been flat over the last year. Some see that as a sign Warren Buffett is flailing. Others -- rightly, I think -- see it as an indicator that the market isn't giving the company due respect. At around 1.1 times book value, Berkshire trades close to a price Buffett himself last fall said "is demonstrably less than the businesses are worth." That should speak for itself.

Johnson & Johnson (NYSE: JNJ  ) trades at less than 12 times earnings and yields 3.5%, or 50% more than 10-year Treasury bonds. The company has paid a dividend every year since at least 1962, with over 49 consecutive yearly increases. Why anyone with more than 10 years to invest would consider bonds at today's prices "safer" than a stock like J&J baffles me. It should baffle you, too.

Whatever you've done with your money lately, keep Munger's definition of risk in mind. And if you're looking for a few other stock ideas, consider the Motley Fool's special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." It's free. Just click here.

Fool contributor Morgan Housel owns shares of Berkshire, Johnson & Johnson, and the Dividend Appreciation Fund. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Johnson & Johnson and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Johnson & Johnson, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (25)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 22, 2012, at 12:18 PM, mdk0611 wrote:

    One thing I had dome in recent years was buy non-financial preferred stocks to get a better return, mainly utilities.

    CAVEAT - Many have call dates which allow redenption for par (normally $25. per share) at some future date. As many of these shares have appreciated, you need to keep track of these call dates well into the future so that you don't lose a year or two of higher income return to a loss on redemption.

  • Report this Comment On March 22, 2012, at 4:14 PM, slpmn wrote:

    Billionaires will have a different definition of risk than your average retail investor. I think it's important to understand that.

  • Report this Comment On March 22, 2012, at 4:21 PM, TMFMorgan wrote:

    ^ Another way of thinking about it: They became billionaires because they think about risk differently.

  • Report this Comment On March 22, 2012, at 4:33 PM, slpmn wrote:

    ^ If you want to talk about characteristics of successful risk takers, sure. If you want to talk about asset allocation for typical retail investors saving for retirement, I think Munger's definition of risk is inadequate. My definition of risk is sitting through 2-3 years of negative 20% SP500 returns and then losing my job in year four.

  • Report this Comment On March 22, 2012, at 7:23 PM, CaptainWidget wrote:

    Berkshire isn't getting any respect on the markets because it doesn't deserve it anymore. Buffet is completely out of tricks. If he best thing he can think to do with his money is throw it at BofA and lobby Americans for higher tax rates, I'd say his best days are behind him.

  • Report this Comment On March 22, 2012, at 9:28 PM, jerryz11 wrote:

    Ridicule Berkshire and Buffett at your own peril. Track records speak louder than sound bites. Just ask those who said he lost it in 2000.

  • Report this Comment On March 23, 2012, at 12:55 AM, kyleleeh wrote:

    <<Berkshire isn't getting any respect on the markets because it doesn't deserve it anymore. Buffet is completely out of tricks. >>

    He doesn't need any tricks the market is doing the tricking for him. Berkshire trades at 1.1 times book value while the companies they hold like KO trade at 5 times book. Buying back his own stock is like buying a $50 jacket and finding a $100 bill in the pocket.

  • Report this Comment On March 23, 2012, at 11:00 PM, portefeuille wrote:

    Even after this year's run, the S&P 500 trades at 14 times this year's earnings. That's not cheap, but it's hardly dear, either.

    ------------

    And "P/E of the S&P 500 index" using 2013 estimates is probably at around 14 as well. Since 2003 there has been very little "movement" in that "forward P/E of the index".

    http://1.bp.blogspot.com/-Bi_FLgmkvao/TjdYY_yP6fI/AAAAAAAAAe...

    from here -> http://blog.yardeni.com/2011/08/s-500-earnings-valuation.htm....

  • Report this Comment On March 23, 2012, at 11:08 PM, portefeuille wrote:

    ... which shows that those "index P/E estimates" are usually reached by the analysts by looking up the current value of the index and dividing it by a number close to 14. Best way to keep your job, I guess ...

  • Report this Comment On March 24, 2012, at 12:33 AM, portefeuille wrote:

    "index P/E estimates" -> "index earnings estimates"

  • Report this Comment On March 26, 2012, at 11:23 AM, GrumpyOldGuy wrote:

    AAAAAH.!!!!!!!!!!

    I hate it when people write financial articles pointing out that the market has doubled over the last three years. What has the market done over the last 5 years you ask? How about down 10%.

    I call this blogger dishonesty because you are cherry picking reference points to make a point.

  • Report this Comment On March 26, 2012, at 12:08 PM, hbofbyu wrote:

    @grumpyoldguy

    That's ok. Morgan accused me of cherry picking when I complained the stock market has been flat over the past 10 years.

    Timing is everything in life.

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