Tuesday, October 19, 2010

Private Investors Beat A Path -- In The Wrong Direction

The recently-ended 3rd quarter was one for the record books. The Dow Jones Industrial Average gained +10.4% during the three-month period and had its strongest September performance since 1939 (+7.7%). That’s an astounding 71 years! September is traditionally the market’s worst month from a performance perspective. The Nasdaq Composite Index did even better than the Dow, up +12.3%, followed by the Russell 2000 Index, +10.9%, and the S&P 500 Index, +10.7%.

The record-breaking rally occurred even though market data show that private investors are fleeing stocks in favor of bonds and gold. Money flows in and out of stock mutual funds were negative every month since May. Conversely, bond fund money flows have been strongly positive all year. These money inflows & outflows are explained by the many media reports trumpeting economic and political uncertainty. Taken together, they dominated the headlines and caused many private investors to abandon their strategic stock allocations for perceived safe havens. History has shown, and the 3rd quarter demonstrated again, that this almost never turns out for the better because it invariably leads private investors to sell-low and buy-high.

Have you substantially changed your investment asset allocations lately? If so, what was your #1 motivating factor?

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