I started my professional investment management career in 1996.
Working at a multibillion-dollar asset management company headquartered in Chicago, I learned quickly how important the role of packaged products is in the investing world.
The company I worked for manufactured myriad packaged products, including mutual funds, separately managed accounts, unit investment trusts and closed-end/exchange-traded funds.
Now, 22 years later, managing assets on behalf of client accounts myself, I find considerable value in monitoring the cash flows of mutual funds as a way to gain additional insight on the state of our capital markets -- and more importantly, whether stocks and bonds are being significantly over- or undervalued.
In my earlier asset management experience with the Chicago-based company, I used to regularly attend Investment Company Institute conferences.
This organization represents the mutual fund industry's interests on several fronts but also publishes valuable data on where money is being invested or divested.
They break down the information across all the different asset classes, such as domestic equity, world equity, taxable bonds and money market funds, to name just a few.
The information is very useful since it captures both the retail and institutional investors' decision-making on where they have allocated their invested assets.
When making my own capital markets forecast, trying to divine what's next for the stock and bond market, I refer to these fund flows data sets.
Here's what they're saying nowadays.
During the past two years, from January 2016 through December 2017, U.S. domestic equity mutual funds experienced a negative net cash flow of more than $471 billion.
This is particularly interesting since the total return on the S&P 500 Index during this period was a gain of more than 30%.
From a behavioral investing perspective, it's very typical of bull markets to thrive on a "wall of worry" -- meaning there's always a reason not to invest in the markets.
The nightly news and other media outlets are constant purveyors of the negative tidbits that keep folks either paralyzed from investing or motivated to exit the capital markets.
During this same period of time, taxable money market funds saw a positive net cash flow of $192 billion.
This fund flow data supports the idea that investors, by and large, have continued to act in a predictable manner during this most recent bull market cycle phase.
The recent stock market correction gives investors sitting on the sidelines an opportunity to finally allocate their portfolios towards equities, especially if they've been sitting on the sidelines in money market funds for the past two years or, most likely, much longer.
However, the investor's behavioral inertia is so strong that many investors will continue to remain on the sidelines. It's usually when these last die-hards finally jump into the market, during a state of general market euphoria, that they participate more fully in the next bear market cycle.
The only way any investor can effectively manage through bull and bear market cycles is to properly assess their target portfolio return.
Doing this gives an investor much more confidence to adhere to their target portfolio allocations and, during a normal bull market correction it gives them an opportunity to rebalance back to strategic asset allocation targets.
No matter where we're at in the current market cycle, any investor can make this self-assessment.
Do you need 3% average annual returns but want 8% average annual returns -- or vice versa? Regardless, market corrections offer more than just portfolio total return opportunities.
They offer a chance to revise the current "wait-and-see" strategy that many millions are currently employing.
