This past week saw the biggest capital inflows into mutual funds in 11 years. Mutual funds are the most commonly used investment vehicles of the average investor. Unfortunately, the average hard working Americans are the ones that buy near highs and sell near lows. This means that smarter, well informed investors and traders should take note, if this is a trend. The markets may not move higher for long.
The average investor gets swept up in the hype of Wall Street. They are ruled by emotion and are always late to the party. Buying at highs and selling at lows is an emotional response, never a smart logical one. The markets are coming off a five-percent rally the previous week as the tax side of the Fiscal Cliff was solved. In addition, markets are trading just a few percent from their 52 week highs. This would not be considered a ‘on sale’.
Use this example to draw the comparison: The average investor goes to Macy’s to do some clothes shopping. Instead of looking for jeans on sale at 50% off, they buy the jeans that were just raised 50%. Another example would be buying milk at the grocery store. The average investors mentality is to be happy paying $9.99 for a gallon of milk yet not buy milk when it is on sale for $1.99. It makes little sense but emotion seldom does.
The massive inflows into mutual funds should continue for a few more weeks. This may keep the markets up into the end of January, through earnings season. However, the bad timing and inability to grasp buying at lows has most likely doomed the average investor again. Once the middle class money is in, the markets will head down until they run for the safety of cash. This is the classic transfer of wealth the media never speaks about.