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Chuck Jaffe
Feb. 27, 2011, 12:01 p.m. EST
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By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) "” Investors showed in January that they are coming back strong to the stock market, and particularly in large-cap U.S. equity mutual funds.
The question is, do you follow the herd or go against it?
According to the Investment Company Institute, the combined assets of the nation's mutual funds rose $55.9 billion in January, with stock funds posting taking in a net $19.5 billion compared to just $939 million in December. Funds that invest primarily in the U.S. took in $11.3 billion in new money last month, compared to $12.9 billion in outflows in December.
With the bull market approaching its third year, Kurt Brouwer, chairman of Brouwer & Janachowski, says large-cap stocks with solid dividends, as well as large tech names, could be better places to invest.
Investment researcher Morningstar Inc., meanwhile, estimates that flows into long-term funds neared $30 billion in January, compared to the $10.6 billion that moved out of those funds a month earlier. And fund-tracker Lipper Inc. tallied $27.3 billion into stock funds "” excluding exchange-traded funds "” making January the best month it had recorded in four years.
The numbers don't tell the whole story, of course.
Historically, January is a big month for new investment, if only because it is the time when many long-term investors rebalance their portfolios, culling their winners and investing the proceeds in laggards to put their portfolio back onto its preferred asset allocation. Investors who had been pulling money from large-cap stocks "” which had $70 billion in redemptions last year by Morningstar's count "” needed to flesh out their holdings.
Another reason for the resurgence is fairly obvious, namely that large-cap domestic stocks are coming off two great years, meaning that enough time has passed from the pain of 2008 for the average guy to finally feel comfortable getting back in.
Truth be told, however, the numbers suggest that the average investor was ready to make that move a year ago, as fund flows were on the increase at that time, only to see investors back away from the market after the "flash crash" in May. The stock market's strong close to the year appears to have overcome those concerns.
"People really seem to be getting their confidence back in funds; they seem to be getting over the hangover from 2008," said Matt Lemieux, research analyst for Lipper. "And when you put the Middle East contagion scaring people a little away from emerging markets funds now, one place many of them feel confident right now is with long-term, domestic funds."
Lemieux noted that there is a disconnect between the investors using traditional funds and those trading in ETFs, a split that was particularly noticeable in January, where money was flowing into long-term funds but flowing out of ETFs to the tune of $6 billion.
"There's a difference between how the conventional mutual fund investor reacts to the news," Lemieux said. "They're not as focused on what is happening right now or today, and they are much more about what they can get comfortable with and buy and hold."
When investors are comfortable enough to buy something, that can actually be a bad sign. Morningstar has a measure called "investor returns" which shows what investors really get out of funds, based on when the money flows in and out. Historically, investors do significantly worse than the funds they buy, because they often buy in at the top of the market. Shareholders then typically hold onto the fund while it falls out of favor, and come away disappointed, having bought high and sold low.
That lousy record is "an observation more than a cause, though, so I wouldn't directly make investment timing decisions based on what investors are doing," said Stephen Savage, editor of the No-Load Fund Analyst newsletter.
"That said, I would consider it along with the overall economic backdrop," he added. "That backdrop is that we've got longer-term headwinds to growth. So, given the known risks and the possibility for more wild cards "” and with equity valuations that we think aren't cheap "” it makes sense for investors to be cautious. The fact that their brethren are not [cautious] should reinforce that message."
Investors become a statistic for a lot of reasons, and people can find plenty of good logic for adding to their equity holdings and domestic large-cap issues now. That said, the numbers should also serve as a reminder that it's hard to make money in the long haul by following the crowd.
Before joining the herd, investors would be well-served to see if they might better diversify their portfolio by going in a different direction.
Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.
Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, "Getting Started in Hiring Financial Advisors," was published in the spring of 2010 by John Wiley & Sons.
"Inside Job" director Charles Ferguson knows how to seize the day, writes Jon Friedman.
11:49 a.m. Today11:49 a.m. Feb. 28, 2011
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