Investors (or gamblers) are nothing if not predictable.
I recently mentioned the annual DALBAR analysis of investor behaviour and how US mutual fund investors were outperformed by the market over every imaginable timeframe.
DALBAR also had another interesting feature in its report, a “guess right ratio” which measured inflows and outflows from funds – i.e. when investors were buying and selling.
After the market went down in 2013 outflows subsequently increased, similarly after the market went up, inflows increased as investors piled back in.
I say investors are predictable because after reading data recently released by US brokerage firms, I’m not surprised to find a similar phenomenon is happening in 2014.
In the first quarter of 2014, TD Ameritrade and E*Trade both recorded 30% plus jumps in retail trading volume compared to the same time last year.
Now why would that be?
Well the clues come from looking at the returns for 2013 and 2012 in the US.
Last year the S&P 500 (without dividends) was up over 26%, add in 2012 and you’re looking at a 44% return over two years.
No doubt the US share market has been raging upwards, but historically those returns are well above average, given the 20 year average annual return for the S&P 500 is 9.53%.
These above average returns appear to have attracted the attention of the retail investor who wants a piece of the action, like clockwork though, they appear to be entering after the boom.
In the first quarter when trading volumes jumped at the retail brokers, the S&P 500 slowed with a 2.24% return, while the year to date figure is 2.52%.
As I always say, I have no idea where the market is going next so I don’t know if these late entry investors will be rewarded.
If history is any guide, they’ve missed the majority of the gains and will inevitably sell out for a loss when we see another correction.
Like clockwork they’ll return again – only after the market has gone back up.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances.
