You and Your Dumb Money

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pkcrafter
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You and Your Dumb Money

Post by pkcrafter » Sun Mar 01, 2015 11:09 am

Retail investors in January plowed a record $30 billion into stocks and exchange traded stock funds (ETFs). This is the fastest inflow since 2000.

But what do the numbers really show?

The retail investor—derided as the “dumb” money on Wall Street—is always late to the game.


http://www.forbes.com/sites/jakezamansk ... -stocks-4/

Caution: A lot of dumb money is going into index funds for the wrong reasons--"The Great Rotation."
Fund flows are dumb money by reallocating across different mutual funds, retail investors reduce their wealth in the long run. This dumb money effect is strongly related to the value effect. High sentiment also is associated high corporate issuance, interpretable as companies increasing the supply of shares in response to investor demand.
It is remarkable that one is able to recover many features of the value effect without actually looking at prices or returns for individual stocks. In our sample, the value effect is generally bigger than the dumb money effect among small cap stocks, but the dumb money effect looks at least as big among large cap stocks
http://www.nber.org/papers/w11526.pdf
ATTN: DUMB MONEY – The Smart Money Is Selling To You (Yet Again)
Right now we are witnessing the most extreme example of this dichotomy between smart and dumb money that has ever been recorded. Rydex traders now have nearly 8 times a much money in bullish funds as bearish ones. This is an all-time high:
http://thefelderreport.com/2014/03/17/a ... yet-again/

Don't be the dumb money. Have you increased your equity allocation? Have you switched equity holdings? Have you maintained your portfolio and rebalanced?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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nedsaid
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Re: You and Your Dumb Money

Post by nedsaid » Sun Mar 01, 2015 11:35 am

Paul, I did a few things. In the second half of 2013 and in the first half of 2014, I did a program of mild rebalancing from stocks to bonds. Over time, this was about 2% of my portfolio and it kept my asset allocation about the same. In 2014, I did a bit of mild trimming of my REITs. Late in 2014, I had available cash and bought into International Stocks. I also did a small bit of growth to value and large to small rebalancing. So I made changes at the margins.

I have been aware of the "dumb money" effect for a long time. I want to know about the money flows into the various asset classes. There are times I swim against the tide hoping to capture some value. This was one of the reasons I sold 15% of my stocks in early 2000, hearing about a co-worker trying to day trade her workplace savings plan was a factor in me deciding enough was enough. When the shoe shine boys start giving stock tips to Joe Kennedy, something is really wrong.
A fool and his money are good for business.

Tamales
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Re: You and Your Dumb Money

Post by Tamales » Sun Mar 01, 2015 11:57 am

Not sure if you noticed, that Forbes article is date 2013?

Outflows were quite large in Dec 2014.
January has the highest inflows many years so that in and of itself is not alarming.
See http://www.ici.org/research/stats

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telemark
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Re: You and Your Dumb Money

Post by telemark » Sun Mar 01, 2015 11:57 am

Oh yes, the "Great Rotation." I'd forgotten about that. Perhaps because that column is two years old now.

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LadyGeek
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Re: You and Your Dumb Money

Post by LadyGeek » Sun Mar 01, 2015 12:09 pm

Here's another perspective from William Bernstein: Factor Rotation - it's probably older than pkcrafter's articles, but still holds true.

I believe the intent is yet another way to show why market timing is not the best course of action. IOW, "stay the course" and ignore the noise.

I do 2 things:

1. Rebalance my entire portfolio once a year.
2. Prior to 2015: Periodically converted my employer's 40(k) matching contribution from company stock into my 401(k) funds - regardless of how well it's doing. Why? Because I didn't track it that often and the contributions occured with every paycheck. I'm buying periodically, so I sell periodically.

Update: Corrected #2. In 2015, my 401(k) plan has changed so that my employer now contributes to my chosen funds instead of company stock.
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garlandwhizzer
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Re: You and Your Dumb Money

Post by garlandwhizzer » Sun Mar 01, 2015 12:21 pm

"Dumb money" reflects sentiment more than fundamentals. When sentiment swings in either direction to extreme levels, it has a negative correlation with future returns. Excessive optimism precedes crashes, excessive pessimism precedes secular bull markets. Most sentiment indicators now show high levels of optimism but not the stratospheric levels that typically precede a market crash. In short the current market is subject to a downturn from its generous valuations when some bad news appears, perhaps a significant downturn, but in my opinion there still remains significant skepticism, lots of fearful cash on the sidelines. There isn't presently sufficient euphoria to initiate a secular bear market but a modest correction could occur at any time. It would be an event that like most market action, is best handled by investor inaction. I do not believe the market is tottering on a high precipice at this point, more like a bump in the road of the current secular bull market that started in 2008. Future returns are likely to be modest by historical standards but not negative. If you have a sound asset allocation plan I suggest you stick with it. This is a time to to be circumspect, not overly optimistic but certainly not panic either.

Garland Whizzer

ShiftF5
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Re: You and Your Dumb Money

Post by ShiftF5 » Sun Mar 01, 2015 1:05 pm

In hindsight, with market performance in hand, I find the inflow and outflow data fascinating.

Just one more reason for me to Stay The Course.

FafnerMorell
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Re: You and Your Dumb Money

Post by FafnerMorell » Sun Mar 01, 2015 1:14 pm

[OT comments removed by admin LadyGeek]

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ehec
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Re: You and Your Dumb Money

Post by ehec » Sun Mar 01, 2015 2:57 pm

At all times it is possible to find some idiot somewhere claiming that the "dumb money" is doing the opposite of the "smart money," where the "smart money" is defined as the money following whatever strategy said idiot has been prattling about most recently.

Financial journalism shrinks your brain.

Bob.Beeman
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Re: You and Your Dumb Money

Post by Bob.Beeman » Sun Mar 01, 2015 6:58 pm

ehec wrote:At all times it is possible to find some idiot somewhere claiming that the "dumb money" is doing the opposite of the "smart money," where the "smart money" is defined as the money following whatever strategy said idiot has been prattling about most recently.

Financial journalism shrinks your brain.
When Einstein died he ended up in heaven, and the folks up there found that he was amazingly skilled at putting new arrivals at ease - he could have a pleasant conversation with anyone. So he quickly became an official greeter, a job that he truly enjoyed.

One day a guy with an IQ of 160 showed up at the gates and Einstein engaged him in a conversation about Art, Literature, Math, and Science. They had a great time.

The next day a guy with an IQ of 110 arrived. He and Einstein had a long conversation about Sports, Politics, and Movies.

On the third day Einstein greeted a man with an IQ of 70. Einstein quickly opened the conversation with "So... which way do you think the market is going?"

- Bob.Beeman.

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nedsaid
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Re: You and Your Dumb Money

Post by nedsaid » Sun Mar 01, 2015 7:07 pm

garlandwhizzer wrote:"Dumb money" reflects sentiment more than fundamentals. When sentiment swings in either direction to extreme levels, it has a negative correlation with future returns. Excessive optimism precedes crashes, excessive pessimism precedes secular bull markets. Most sentiment indicators now show high levels of optimism but not the stratospheric levels that typically precede a market crash. In short the current market is subject to a downturn from its generous valuations when some bad news appears, perhaps a significant downturn, but in my opinion there still remains significant skepticism, lots of fearful cash on the sidelines. There isn't presently sufficient euphoria to initiate a secular bear market but a modest correction could occur at any time. It would be an event that like most market action, is best handled by investor inaction. I do not believe the market is tottering on a high precipice at this point, more like a bump in the road of the current secular bull market that started in 2008. Future returns are likely to be modest by historical standards but not negative. If you have a sound asset allocation plan I suggest you stick with it. This is a time to to be circumspect, not overly optimistic but certainly not panic either.

Garland Whizzer
My take on this is that the memories of the 2000-2002 and the 2008-2009 bear markets are too fresh. It is hard to imagine that a market euphoria could develop in such a short time. I also see a lot of articles talking down the stock market. There is a lot of skepticism out there.
A fool and his money are good for business.

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nedsaid
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Re: You and Your Dumb Money

Post by nedsaid » Sun Mar 01, 2015 7:36 pm

ehec wrote:At all times it is possible to find some idiot somewhere claiming that the "dumb money" is doing the opposite of the "smart money," where the "smart money" is defined as the money following whatever strategy said idiot has been prattling about most recently.

Financial journalism shrinks your brain.
I have a bit of a contrarian streak but I am not contrarian for the sake of being contrarian. What I am looking for is performance chasing by the public. That is buying what has already done well. But I don't blindly do the opposite of the money flows as the crowd is often right. Bullish trends can last a very long time.

So if I swim against the tide and put new money into relatively cheap asset classes, I do it with the knowledge that I might be wrong. What is cheap might get cheaper and what is more expensive might get more expensive. But over longer periods of time, the odds favor an investor who buys assets at cheaper prices.

Warren Buffett has often talked about this. The good old "Be greedy when others are fearful and fearful when others are greedy" quote. It doesn't work 100% of the time but it does improve your odds for success. If I see an ad in the paper that toilet paper is 50% off, I would be likely to stock up. I won't write posts on the Boglehead Forum about the efficiency of toilet paper markets. I know that eventually I will use every bit of it.
A fool and his money are good for business.

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Kevin M
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Re: You and Your Dumb Money

Post by Kevin M » Sun Mar 01, 2015 8:30 pm

pkcrafter wrote:Have you increased your equity allocation?
No. If anything, I've made a mental note to allow it to drift down from 30% to 25% if the market gods so dictate.
pkcrafter wrote:Have you switched equity holdings?
No. Can you be more specific?
pkcrafter wrote:Have you maintained your portfolio and rebalanced?
Yes. I've sold some individual US stock holdings over the last year, and in early January, bought some Europe and Pacific, which are up about 10% since then. On the day I bought, livesoft was questioning my sanity, given the turmoil in Europe. That kind of puzzled me, but I know that livesoft is a troublemaker.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

ShiftF5
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Re: You and Your Dumb Money

Post by ShiftF5 » Sun Mar 01, 2015 10:26 pm

Bob.Beeman wrote:
ehec wrote:At all times it is possible to find some idiot somewhere claiming that the "dumb money" is doing the opposite of the "smart money," where the "smart money" is defined as the money following whatever strategy said idiot has been prattling about most recently.

Financial journalism shrinks your brain.
When Einstein died he ended up in heaven, and the folks up there found that he was amazingly skilled at putting new arrivals at ease - he could have a pleasant conversation with anyone. So he quickly became an official greeter, a job that he truly enjoyed.

One day a guy with an IQ of 160 showed up at the gates and Einstein engaged him in a conversation about Art, Literature, Math, and Science. They had a great time.

The next day a guy with an IQ of 110 arrived. He and Einstein had a long conversation about Sports, Politics, and Movies.

On the third day Einstein greeted a man with an IQ of 70. Einstein quickly opened the conversation with "So... which way do you think the market is going?"

- Bob.Beeman.
Well done, sir. :D

Ninegrams
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Re: You and Your Dumb Money

Post by Ninegrams » Sun Mar 01, 2015 11:49 pm

Tamales wrote:Not sure if you noticed, that Forbes article is date 2013?

Outflows were quite large in Dec 2014.
January has the highest inflows many years so that in and of itself is not alarming.
See http://www.ici.org/research/stats

Maybe the "dumb money" wasn't so dumb after all. :)

pkcrafter
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Re: You and Your Dumb Money

Post by pkcrafter » Mon Mar 02, 2015 10:16 am

Maybe the "dumb money" wasn't so dumb after all.
No, the dumb money remains dumb money. I chose the title carefully--you and your dumb money--because investors do have a choice. They can choose to have dumb money or smart money, but no matter what, there will always be dumb money :confused .

We are still seeing new board members choosing and justifying very high equity allocations and coming up with rational-sounding reasons to not use bonds...etc. Vanguard continues to see big inflows of new money into index funds, but for all the wrong reasons.

1/11/2015

http://www.thefiscaltimes.com/Columns/2 ... Means-2015

Dumb money is, and will always be, alive and dumb.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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House Blend
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Re: You and Your Dumb Money

Post by House Blend » Mon Mar 02, 2015 11:55 am

pkcrafter wrote:Dumb money is, and will always be, alive and dumb.
Smug condescension seems to be in no danger of fading out either.

Ninegrams
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Re: You and Your Dumb Money

Post by Ninegrams » Mon Mar 02, 2015 11:57 am

pkcrafter wrote:
Maybe the "dumb money" wasn't so dumb after all.
No, the dumb money remains dumb money. I chose the title carefully--you and your dumb money--because investors do have a choice. They can choose to have dumb money or smart money, but no matter what, there will always be dumb money :confused .

We are still seeing new board members choosing and justifying very high equity allocations and coming up with rational-sounding reasons to not use bonds...etc. Vanguard continues to see big inflows of new money into index funds, but for all the wrong reasons.

1/11/2015

http://www.thefiscaltimes.com/Columns/2 ... Means-2015

Dumb money is, and will always be, alive and dumb.


Paul
Yes, but you chose a two year old article ( the one that I glanced at anyway ) to help make your point. And my tongue in cheek reply was that the "dumb money" hasn't done too badly over the last two years. I don't know if my money is smart or dumb, only the future will answer that question for me. I do know that it will be my choice, and not one that I will blame myself for following the advice of some guru. Personally, I love bonds, which no doubt makes me an idiot in some eyes. Do I care?

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