The tragedy of emotional investing [Quarterly Perspectives]Contributor Global Markets Insights Strategy Team
Since 2009, the S&P 500 Index has surged 250%, providing a generational opportunity for investors to boost their retirement accounts. Tragically, fund flows statistics show that many retail investors have failed to capitalise on this opportunity, piling into bond funds instead.
Invest with your head, not your heart
Retail investors often allow the way they feel about the world around them to influence their investment decision-making. But seldom in history has the damaging result been on such raw display:
- The technology bubble of the late 1990s is a striking example. From 1997 to 1999, cumulative flows into equity funds were 13 times higher than flows into bond funds. The tech bubble burst on 24 March 2000, and in the next two years, the S&P fell by roughly 50% and Nasdaq by 80%, wiping out trillions of dollars in wealth.
- If the technology bubble was about greed, the period since the 2007—2009 financial crisis has been about the opposite emotion: fear. Despite a meteoric rise in stock prices, retail investment flows have been net negative in equities, and overwhelmingly positive into bond funds. Again, investors made the wrong call at the wrong time - all because of how they feel.
What retail investors can learn from the ‘smart money’
Individuals have pulled money out of equities during the current bull market while the ‘smart money’ institutions have continued to add risk assets. Institutions typically have a robust investment discipline with set targets, helping them avoid the emotional pitfalls faced by retail investors, such as ill-timed investments or heavy imbalances in a portfolio.
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The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.