Thanks to renewed uncertainty over the economic health of the European continent, stock markets have been in a tizzy lately, marking large advances and declines on a daily basis. Uncertainty is back on the menu, and investors are reacting by sticking new money into two perhaps unsurprising places -- bond funds and index-based products. But are these the right moves to make right now?
Raking it in
According to data from fund researcher FRC, the following funds experienced the biggest new inflows during April:
- PIMCO Total Return (PTTAX): $2.7 billion
- Templeton Global Bond (TPINX): $1.9 billion
- Vanguard Total Stock Market Index (VTSMX): $1.6 billion
Vanguard Emerging Markets Stock ETF
(NYSE: VWO): $1.5 billion
- Vanguard Total Bond Market Index (VBMFX): $1.3 billion
Claiming the next five slots, in order, were BlackRock Global Allocation (MDLOX), Vanguard Total Bond Market II Index (VTBIX), SPDR Gold Shares
What this data shows is that even though investors are slowly getting over their fear of the stock market's wild ride, they're still parking a lot of money in the perceived safety of bonds. If you're one of the many folks who is hoping that bonds will again lead the market in coming years, odds are pretty good you're going to be sadly disappointed. Given that interest rates have nowhere to go but up, the bull market party is pretty much at an end for bonds.
Of course, investors will still need the volatility-reducing power of fixed-income instruments in their portfolio. But if you want your portfolio to grow over the long run, you're going to need equities. So if you're thinking about where to deploy new money in the near future, think about putting it into stocks or a diversified stock fund. Vanguard Total Stock Market Index is a good choice, as is the SPDR S&P 500 ETF
With that in mind, it is encouraging that investors aren't completely shunning stocks, based on the April flow data. I'm not too surprised that index products had the biggest inflows into equity funds. Index funds are an easy way for risk-wary folks to get their toes back into the stock market at a low cost and without the hassle of searching for those rare active managers who consistently beat the market. Most of the growth in the fund industry in the next decade is likely to come from passively managed products like index funds and exchange-traded funds rather than actively managed vehicles for some of those very same reasons.
The two Vanguard index mutual funds listed among the top five are also available in super-cheap ETF format. Consider checking out Vanguard Total Stock Market ETF
Of course, it shouldn't be unexpected that the SPDR Gold Shares ETF shows up on the top 10 list. Gold has been on an absolute tear in recent years, and a lot of investors have been jumping on the bandwagon. While gold can serve as an inflation hedge in your portfolio and has typically had a lower correlation with equities, I would be wary about buying in at current prices. Uncertainty over the situation in Europe has been the primary driver of gold prices in recent months, and I'm not convinced this is a trend that will continue. I think most of the profits in this sector have already been made, so I'd recommend shying away from gold for now or at a minimum, keeping exposure to a very small percentage of your portfolio.
Lastly, of the four actively managed mutual funds that made the April inflows list, I can't quibble with them too much. All are very good funds with excellent long-term track records and long-tenured managers. No doubt the star power of Bill Gross of PIMCO Total Return and Bruce Berkowitz of Fairholme has been a major selling point for these two funds, along with their stellar performance histories. However, investors should be aware that PIMCO Total Return, Templeton Global Bond, and BlackRock Global Allocation all come with front-end loads, which I recommend investors avoid paying at all costs. If you can get access to any of these funds within your 401(k) or other qualified retirement plan, you can likely avoid paying the front-end load.
Load-free Fairholme has been attracting a lot of attention, thanks to its ranking in the top 1% of its peer group over the past 10-, five-, and three-year periods. While this is an excellent option for the long run, don't necessarily expect the fund to continue topping the charts every year. It's likely to stumble at some point. And given that manager Berkowitz has recently added positions in recovering financial names such as Citigroup and AIG, there's a decent amount of risk in the portfolio. If Citigroup and AIG have in fact cleaned up their act and their balance sheets, the fund could profit. But another shock to our financial system could have dire consequences for these big names, as well as for Fairholme.
Ultimately, while investors are still a bit risk-shy, for the most part they are making reasonable choices about where to invest. The funds heading up the inflow list are all fairly decent, solid options. And while you probably don't want to hide in the shadow of bonds as much as investors are right now, it's probably not a bad idea to slowly build up your equity exposure via low-cost ETFs or a few well-selected actively managed funds. It's rare that investors in the aggregate make consistently reasoned and well-thought-out investment choices, but at least for now, it looks like many are on the right track.
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Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement newsletter. Amanda owns shares of Fairholme Fund. The Fool owns shares of Vanguard Emerging Markets Stock ETF and Vanguard Total Bond Market ETF. The Fool has a disclosure policy.