Reminiscent of the dog days of 1971-1982, investors are again fleeing equity mutual funds at a record pace. The market recovery of the past year has proven sufficient only as a opportunity to run from equities with partial capital recovery. According to the New York Times, on Sunday, August 22nd.
“Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to theInvestment Company Institute , the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.”
These tremendous outflows–$33 billion already this year—will eclipse all previous years since the 1980’s, with the exception of the market collapse of 2008. The money is flowing into bond funds—at precisely that time when bonds are more overvalued than anytime in history of multiple generations. This concerns many market forecasters, who are concerned by a severe double negative experience—a substantial loss of capital from the equity markets and then a subsequent loss of capital from the bond markets. Investors may experience another decade of hopes dashed by retail investing—in addition the the just completed “lost decade.”
The loss of faith in mutual funds and the risk to capital would have deep-seated impacts to the financial services business. Financial advisors and their brokerage firms, dependent upon a growing pool of assets and a continued movement to fee for service businesses, could face severe strategic disruption. Investors will likely seek investments that do not risk principal. Investors will look for different means to earn interest above bank certificate of deposits and offer them income guarantees, but not at the risk of principal.