The Motley Fool has long championed index funds as a terrific way for most people to invest in the stock market. Index funds became so popular over the past years that the Vanguard 500 Index fund (based on the S&P 500 index of 500 premiere American companies) became the biggest mutual fund in America, taking the title away from Fidelity's Magellan Fund. Now Vanguard has been surpassed.
Blame the economy and the stock market's long bearish season. The largest mutual fund is now the Pimco Total Return fund, which focuses on government bonds and is managed by Bill Gross.
As of the end of September, Pimco sported $64.6 billion in assets, compared to $62.8 billion for the Vanguard 500. This shift at the top reflects widespread shifts in the market. According USA Today, "Investors poured $88.6 billion into bond funds through August, according to the Investment Company Institute, the funds' trade group... The ICI says investors yanked $77 billion from stock funds since June."
It happens all the time. When the stock market sinks, investors flee stocks, heading for bonds. That is the right move for some investors, but it's wrong for many. When stocks are at record lows, that's often a good time to invest in them.
According to Jeremy Siegel's seminal Stocks for the Long Run, between 1946 and 2001, the average annual return for stocks was 11.6%, compared to 4.9% and 5.5%, respectively, for short- and long-term government bonds. He also points out that stocks outperform bonds in 82.4% of all 10-year holding periods between 1871 and 2001. (It's 95.4% for all 20-year holding periods, and 100% for all 30-year periods.) Of course, it all depends on which 10- or 20- or 30-year period you're investing in. Over the past 15 years, for example, bonds have returned an annual average of 11%, compared to about 9% for the S&P 500 (still solid numbers, in both cases).
Before you join the throng rushing to bonds, learn more about them. As interest rates rise, bond prices fall -- not an unlikely scenario in the coming years. Meanwhile, to learn more about the increasingly influential Pimco manager Bill Gross, read this interview, this article, or this book, Bill Gross on Investing.