IB Net Payout Yields Model

Another Report on Small Investors Fleeing the Stock Market

Just reported the other day on the outflows of equity funds and into bond funds that were hitting dangerous levels. The New York Times reported over the weekend about how small investors continue to make the wrong move. This time its the movement into bonds even as corporations continue to recover.

Some $33B has exited equity mutual funds at a time that billions should be flowing into the funds. Fidelity also reported that the percentage of equity holdings in 401Ks is down to 57% from a historical average of around 70%.

What is scary is that small investors likely consider bond funds as safe and don't understand the risk of investing in bond funds. If interest rates go up, these bond funds will drop in price. Completely different risk from investing in a bond that you plan to hold to maturity where your just accepting company risk if they were to go bankrupt.

Another interesting stat is that while money flowed into stocks in March & April as the market peaked, money actually flowed out of stocks in July even with a 7% rally. Its possible that the flash crash scared investors or maybe the relentless fear of another depression is having a self fulfilling prophecy as it scares individuals into not spending or investing.

Regardless, money continues to flow into bond funds at levels similar to the tech boom in 2000. We all know how that trade worked out.

  • Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds. 
  • Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds. 
  • The stock market rose 7 percent last month as corporate profits began rebounding, but even that increase was not enough to tempt ordinary investors. Instead, they withdrew $14.67 billion from domestic stock market mutual funds in July, according to the investment institute’s estimates, the third straight month of withdrawals.


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