It is hard to find a more real-time quantitative indicator of the retail investor than mutual fund flows. After five years of very strong US equity market performance, the so-called “mom-and-pop” investors are beginning to view equity investments in a more positive light.
These investors are undoubtedly late to rally and their strategy will likely, as it already has, result in sub-par returns with excessive volatility. Are retail investors a contra-indicator? Yes, but that doesn’t mean an equity correction is imminent either.
After a long enough time of pounding the table with regard to the pitfalls of behavioral risk (e.g. emotional investing), I anticipated that I wouldn’t have been phased by the continually-flawed investment process of the aggregate retail investor. But human nature is human nature; and given enough time, cycles will infallibly repeat.
Consider the following:
Source: WSJ (paywall)
