January was a rough month for the U.S. stock market, a terrible one for emerging markets and good for bonds. Like moths to a flame, mutual fund investors responded accordingly, taking a record amount of money out stocks and moving much of it into bonds.
For the week ended Feb. 5, a record $18.8 billion came out of U.S. equity mutual funds and ETFs, according to Lipper. In the same timeframe, $2.7 billion came out of related funds while a record $10.7 billion flowed into bond funds and ETFs. A separate report from Citigroup put the figures at $24 billion of outflows from U.S. equity funds, $6.4 billion out of ETFs and $13 billion into bond funds, Bloomberg reports.
However you measure it, the point is all the figures for the period are record highs for weekly data -- and represent a sharp reversal from 2013 trends when $172 billion flowed into U.S. equity funds, the first year of positive flows since 2007.
It's a mistake to draw too many conclusions from just a week (or even a quarter) of fund flow data but it does seem like there was a "great un-rotation" after the January selloff, with money rushing out of stocks and back into the perceived safety of bonds.
As I discuss in the accompanying video with Jeff Macke, it's understandable that many investors got spooked by the stock market's sharp slide to start the year.
"At the end of the day...we're really just big, dumb animals," Macke says. "No matter what we tell ourselves all the way down, when push comes to shove we head for the exits."
And while to err is human it is somewhat surprising how quickly investors seemed to have forget to the supposed biggest 'lesson of 2013': You can lose money in bonds.
Furthermore, Macke notes there's a transaction cost for the repeated rapid-fire flipping out of stocks and into bonds (and vice versa). Over time, these costs erode the value of your portfolio and are the key reason academic research shows passive index investing tops active market timing over the long haul.
In some ways, today's conversation is a continuation of the 5 Rules for the Selloff discussion Macke and I had earlier this week.
"I should've added rule number six," Macke quips. "In corrections, whatever you're feeling on an emotional basis is exactly dead wrong. You do the opposite," i.e. The Constanza Rule.
In sum, while it's much easier said than done, anything you can do to take emotional, knee-jerk reactions out of your investing will serve you extremely well in the long run.