The Average Investor Is Incredibly Boring

Have you heard about the "great rotation?" It's the theory that after pulling money out of stock mutual funds and dumping it into bond funds for the last six years, investors are about to change direction, yanking money out of bonds and sending it into stocks.

It's already happening. According to the Securities Industry and Financial Markets Association, investors pulled $554 billion out of stock mutual funds between 2008 and 2012, and put more than $1 trillion into bond funds. But in the last year, $158 billion has gone into stock funds, and $58 billion has been pulled out of bonds.

There's your great rotation.

But dig into the numbers, and you'll see there's nothing great at all about what's happening. Withdrawals of $100 billion, or $500 billion, might sound enormous, but you have to remember that Americans today own $14.3 trillion worth of mutual funds.

When you put the great rotation into context of the size of the market, it's barely a drip:

Year

Money Pulled Out of Stock Funds

Total Amount in Stock Funds

Percent of Total Assets Pulled Out of Stock Funds

2008

$238 billion

$3.7 trillion

6.4%

2009

$11 billion

$4.9 trillion

0.2%

2010

$24 billion

$5.7 trillion

0.4%

2011

$128 billion

$5.2 trillion

2.5%

2012

$153 billion

$5.9 trillion

2.6%

We're talking about moves in the low single percentage points. It's tiny. And a lot of the money pulled out of stock mutual funds went into stock ETFs, so the moves were actually smaller than presented here.

There's more action in bond funds, but it's still pretty small:

Year

Money Put Into Bond Funds

Total Amount in Bond Funds

Percent of Total Assets Added to Bond Funds

2008

$33 billion

$1.6 trillion

2.1%

2009

$375 billion

$2.2 trillion

17%

2010

$244 billion

$2.6 trillion

9.4%

2011

$125 billion

$2.9 trillion

4.3%

2012

$304 billion

$3.4 trillion

8.9%

When you see the headline "Investors plow $125 billion into bond funds," it sounds extreme. If you saw the headline "Investors increase their exposure to bonds by 4.3%," you wouldn't bat an eye. They're basically saying the same thing, but the latter is in better context.

In markets, prices are set at the margin, meaning the price you see on your screen just represents the last trade made, even if it was a single share. I think there's a tendency to assume that when the market is crashing, everyone is running for the exits. But that's almost never the case. The huge majority of American investors add a little bit to their investments each month through their 401(k), and then just forget about it. The day-to-day, even year-to-year, action in markets is directed by a very small percentage of investors.

Here's what I wrote a few years ago, when the S&P 500 (SNPINDEX: ^GSPC  ) fell nearly 20% in 2011:

At the Vanguard Group, 98% of investors didn't make a single change to their retirement portfolios in August, when market volatility peaked. "Ninety-eight percent took the long-term view," wrote Steve Utkus, who oversees the Vanguard Center for Retirement Research. "Those trading are a very small subset of investors."

Even during longer periods when markets underwent gut-wrenching drops, the percentage of Vanguard investors who called it quits was incredibly small. "We know from our research that during a financial crisis, few investors actually cash out their entire portfolios," Utkus wrote. "Yes, there is always a small fraction of investors -- 3% in the recent financial crisis -- who sell everything, so there's always someone to interview about getting out of the market. But they aren't typical investors."

When the headlines portray everyone freaking out, most people are actually pretty calm. 


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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 January 29, 2014, at 4:20 PM, SkepikI wrote:

    <When the headlines portray everyone freaking out, most people are actually pretty calm.>

    Presumably referring to their ACTUAL actions in response to media freaks.....not their emotional state. So are you really this sanguine about what happens when the Fed continues to exit the bond market and bond fund values fall, say 10%?

    I think we had a "taste" of this in 2013 briefly that then reversed itself as the drop arrested. But I would be very interested in you reprising this at regular intervals because it is something I randomly view as important. I suspect that Bond action on a sustained decline will not be pretty and might be more dramatic than anyone suspects because of the demographics. No I don't know for certain, but to quote a well known sage Housel: "Emotions eat facts for breakfast"

  • Report this Comment On January 31, 2014, at 6:49 PM, whyaduck1128 wrote:

    "Great Rotation" is down there with "plunge", "crater", "surge", and "skyrocket" in terms of overused and misused market terms.

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