Business Columns & Blogs

Summer’s dog days are here, but don’t expect fall to bring back rational investing

The dog days of summer have arrived as the calendar flips over to August. Hot sultry days were thought by Greek and Roman astrologers to cause drought, sudden thunderstorms, flash floods, lethargy, fever, mad dogs and bad luck.

Speaking of bad luck, the Investment Company Institute reported that from the end of the third quarter of 2018 to early July 2019, $105 billion flowed out of equity mutual funds and exchange-traded funds, compared with $130 billion that flowed into fixed-income and bond funds. The emotional zigzagging investor moved a net $235 billion in the wrong direction, at exactly the wrong time, proving once gain the futility of market timing.

Can’t we all just stay invested?

In the meantime, financial assets of all kinds have enjoyed some of the best gains in a decade and show no signs of slowing. Every major asset category has notched gains this year ranging from 5% to 20% as of June 30. The record bull market gains and 10 years of uninterrupted economic growth remain intact, at least for now.

“Hedged” stock mutual funds and “buffer” funds of all kinds are making a comeback, according to MutualFunds.com. These manufactured financial products purport to offer investors “upside in the stock market with less risk.” The concept is deeply attractive to the investing public, enticing those willing to dip a toe in the water after missing 2019’s spectacular first-half results.

Daly, Mark.jpg
Mark Daly

The problem occurs when these products and strategies fail to produce enough money to meet growth and spending needs, as the protections often cancel at least some of the upside return. Hedged products often use options contracts that can drive up cost and complexity. Most disturbing of all, investors are led to believe you can have your cake and eat it too. Normal fluctuations and stock market volatility are inherent when seeking higher returns over long time periods.

And how about those bonds and bond funds? Declining interest rates have created fixed-income gains this year, but only one-third to one-half the gains made in the various stock markets around the world. James Grant reported in Barron’s article “The Trouble With Austria’s 100-Year Bonds”(www.barrons.com/articles/jim-grant-the-trouble-with-austrian-centuries-51562354708) that 20 of 30 top holdings in a large international bond index fund pay negative yields, yet trade near yearly highs, as purchasing sovereign debt today from France, Germany and Spain almost assures you’ll receive less money than you put in.

Novice online trading is trying to make a comeback. Online “core trading” classes can range from $2,200 to $5,500 for four to 12 sessions. Students are informed that “each trainer has a unique personality that will keep you on the edge of your seat waiting for the next “golden nugget” of trading information”. But wait, there’s more! Classes in speculative options, futures and foreign currency exchange are also available.

So how and when will the halcyon dog days give way to fall colors, cooler heads and cooler temperatures?

When bond funds no longer have huge inflows. When cocktail party chatter turns to the killing your neighbor made in a unicorn IPO. When you replace your adviser because your neighbor earned X% on a portfolio but you earned less. When yields on bonds and sovereign country debt provide a reasonable alternative to stock prices and rising dividends. When the “safe money” shows on AM radio no longer have an audience. And when individual investors are lined up to pay big tuition to gather those last few remaining “golden nuggets.”

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