For mom-and-pop investors, though, the “buy the dip” mantra is seemingly at an end, killed by more than three years of wild swings in the market that have tended to hurt, not help, passive investors.
Retail and institutional investors are yanking money away from US equity funds as volatility spikes and sticking with safe-haven assets.
The S&P 500 index lost 5.7 percent in August, and money managers for high-net-worth individuals, as well as retail and institutional investors, have responded by shielding wealth.
“Investors are getting nervous as the markets go down. They are not feeling it as a buying opportunity but are more worried about the preservation of their capital,” said Thomas Wilson, senior investment manager and managing director of the institutional investment group at Brinker Capital.
He said investors, having finally recuperated most of their losses since the market plunged in October 2008, are selling now because they’re worried about another repeat of the crisis.
US domestic equity funds have registered almost $38 billion of outflows so far this year. Outflows have topped inflows annually since 2007, according to the Investment Company Institute, a US mutual fund trade organization, after years of steady inflow to US stock funds.
As money flows out of equity funds, money managers are scrambling to find the safest asset that provides the best return for investors.
Yields on the US benchmark 10-year Treasury note fell below two percent, matching a summer low not seen in 60 years. But fund flows show many investors view the note as better than riskier assets like stocks.
“People are chasing returns, they are being very risk-averse and scared about the stock market, and money is flowing into the bond market despite the low yield,” said Bernie Williams, vice president of discretionary money management for USAA.
Worries that governments do not have a clear path to ignite economic growth are keeping investors safely ensconced in the bond market, which has recorded $73 billion of inflows this year.
The markets’ swoon in August was sparked by lack of confidence in elected US officials following the public infighting over the debt-ceiling drama.
“They are selling (equity) now and going to cash and worrying about where to invest later,” said Wilson, who has $12 billion in assets under management at Brinker Capital.
The ‘buy the dip’ mantra, which was squashed in 2008 and 2009 for US stock funds, may have shifted to emerging markets.
Emerging market equity funds have seen only one year of outflows in the last 11 years, according to ICI.
With emerging markets’ gross domestic product averaging 6.6 percent, outpacing the 2.5 percent for the United States and 2.0 percent for Europe, according to IMF data, investors see these less-developed markets as a good place in the long run.
“Investors are reallocating their assets and diversifying more into the global economy,” said Darlene DeRemer, managing partner at Grail Partners, an investment bank and financial advisory firm.
“Mutual funds in terms of penetration in the US is fairly saturated. So the growth opportunities for US money managers is outside the US and in global products,” DeRemer added.
Bond funds have $73 billion of inflows so far this year and six consecutive years of positive flows.
Professionals cannot help but think that bond funds are a losing bet in years to come, citing the sharp decline in long-term yields to levels not seen in six decades. In that sense, they believe investors are repeating the mistakes of earlier years, just in a different asset class — bonds, instead of stocks.
“Most people don’t have access to alternatives. And even though yields are low, that is what they are doing — it is probably a long-term mistake — but that is what they are doing now, chasing returns,” said USAA’s Williams, who has direct management of $4 billion from high net worth individuals.
But many find it the only place to go.
Austin Warrin, vice president and wealth adviser at Morgan Stanley Smith Barney, advocates equities if there is due diligence in picking the right companies.
He knocks the rationale of investing in US bonds that yield 2 percent when many individual stocks pay a 3.5 percent to 4 percent dividend.
“I have been pouring money out of fixed income and into equity. Fixed income to me is looking like a ticking time bomb,” Warrin said.
“The reason we are in so much trouble is because we have so much debt — and what is fixed income? It is just debt. So who cares if you own a lot of debt if the company (or government) can’t pay on it,” Warrin said.
“I think the debt side is at much greater risk than it ever has been right now.”
