In December 2018—the worst December for the S&P 500 since 1931—a record $89 billion flowed out of equity mutual funds.
Can you guess what happened in the weeks that followed?
The S&P climbed 7.9% in January, booking its best performance in 30 years. This is a fresh version of an old story. Attempts to time the market—to invest at the right time and to sell at the right time—don’t work. Investors tend to enter markets late and leave too early. They have not demonstrated an ability to buy and hold unhedged equities across recent full market cycles, as this chart shows.
The blue bars in Figure 1 illustrate the buying and selling patterns of investors, represented by trailing 12-month domestic equity mutual fund flows. Since 2000, the peak selling over the past two cycles occurred at market bottoms, and the selling continued after the financial crisis ended. Investors were largely absent from the post-crisis rally, which many believe was partly caused by the recent volatility triggering emotional reactions.
Markets can be volatile, and that volatility can test an investor’s ability to buy and hold. This is true of investing in established U.S. markets and it’s also true of investors in emerging markets. Investors who sell when they’re uncomfortable tend to have unfortunate timing—selling at a market’s bottom and missing when the markets rally.
Figure 2 tracks the growing investment, via mutual funds, in emerging markets since 1993. In February 1993, the first month Morningstar began reporting Diversified Emerging Markets category net flows, $39 million was in funds whose benchmark was the MSCI Emerging Markets Index.
The blue bars in Figure 2 illustrate the buying and selling patterns of investors, represented by the estimated net flows into the category. The green line illustrates the jagged ascent of the index. As can be seen at multiple times over the years, those who took part in peak selling at market bottoms were largely absent from rallies that followed.
Return to the Volatility Guide
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The S&P 500 Index is considered generally representative of the U.S. stock market. Indexes are unmanaged, do not entail fees or expenses and are not available for direct investment.
MSCI World Index is a market capitalization weighted index composed of companies representative of the market structure of developed market countries in North America, Europe, and Asia/Pacific region.
The MSCI Emerging Markets Index represents large and mid-cap companies in emerging markets countries.
The VIX (CBOE volatility index) is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.
The Morningstar Diversified Emerging Markets Category is comprised of funds with at least 50% of stocks invested in emerging markets.
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