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Individual Investors Jumping Back into the Market have Missed Quite a Ride

Investment research firm TrimTabs said that a net $78 billion was added to stock mutual funds and ETFs in January, which was the most since 2000 and the first net positive month since early 2011.  Much of that was driven by individual investors who are finally investing in equities again after years of pouring money into bonds. 

Investors who’ve put money back into the US stock market in January have seen great performance with the market up 5.5%.  However, they would have seen much better performance had they not rushed out of equities after the financial crisis.  If an investor had maintained an allocation to US stocks from February 1st of 2009, near the bottom of the market when things looked bleakest, through the end of January 2013 an investor would have more than doubled their money.  That 4 year period has been one of the strongest bull markets in the history of the US with a 19.4% annualized return. 

The lesson here is that trying to time the market costs investors money.  Exiting the stock market in early 2009 when equities did not look promising ended up costing many investors great performance.  While the peaks and valleys of the equity market can be tough to stomach it is clear it is better to remain invested than to try and time when to get in or out of the market.  The fixed income allocation in a portfolio also helps to stabilize performance and reduce the white knuckles that the equity market can leave you with.

With US equity markets surging we seek to sell US stock holdings by strategically taking profit off the table and moving back to asset allocation targets.  Having such a disciplined process in place leads us to sell when asset classes have performed well and buy when they are out of favor.  This sets up a portfolio to benefit when each asset class is performing well.

Index Performance                                    Jan.     Trl 1 yr.     

US Stock (Russell 3000)                                 5.49%    16.90%     
Foreign Stock (FTSE AW ex US)                  4.09%     14.54%
Total US Bond Mkt. (BarCap Aggregate)    -0.70%      2.59%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.12%       0.51%       
Municipal Bonds (BarCap 1-10yr Muni)       0.23%       2.71%       
Cash (ML 3Month T-Bill)                              0.00%       0.11%