Investors Missed the Boat After the Financial Crisis

Tim Strauts: In today’s chart we are going to examine investor behavior by looking at where people invest their money on an annual basis. The chart shows worldwide fund flows into mutual funds and ETFs by asset class. Historically, the best predictor of future flows is recent past performance. Asset classes with good performance over the last year tend to get strong flows in the following year.

Generally speaking this is not the best way to invest. For example, in 2009 after the financial crisis and at the beginning of a strong bull market in stocks the largest flowing category was fixed income. Actually, fixed income received the highest flows from 2009 to 2012. The traumatic experience of the financial crisis scared investors out of investing in U.S. equities all the way until 2013. By waiting so long to invest the average investor missed out on the best returns of the bull market.

Another trend is the strong flows into international stocks. This trend goes against the pattern of flows following performance because international stock returns have been much lower than U.S. stocks returns in the last several years. So despite having lower recent returns investors are allocating more money into international stocks. It seems that investors are doing everything they can to avoid buying U.S. equities.

In conclusion, the patterns in this chart show the behavior of the average investor. It is generally not a good idea to follow the crowd in investing. Instead the more prudent choice is to look to invest in unpopular categories. The best example of this is the fantastic returns you could have received in U.S. stocks over the last seven years.