The Average Investor Is Incredibly Boring

Putting the "great rotation" in proper context.

Jan 29, 2014 at 10:52AM

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. 

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers