Bulls and bears make money, sheep get slaughtered.
That old saying may apply to the wave of investors who are suddenly abandoning fixed income and piling into equity and commodity markets that may have already peaked.
A survey of global fund managers by Bank of America Merrill Lynch this week found that investor optimism toward equities and commodities is at a nearly 10-year high.
Not coincidentally, those same fund managers are seeing a stampede of investors out of low-yielding bonds and into stocks.
That could be a big problem that is likely to get bigger, says Thomas Dyck, president of Toronto Dominion Bank's mutual fund unit, which had $60.5-billion in assets invested at the end of January.
Average investors tend to follow market momentum and end up buying when valuations are high and selling when they're low, Dyck said. These are the so-called 'sheep.' "Investors tend to make the wrong decisions at the wrong time," Dyck said. "What I worry now is that given where we are in the interest rate cycle, that people begin to take wholesale swings in their investment approach," he said.
He's telling his advisers to help their clients focus on long-term goals, and not to obsess over short-term trends.
Near-zero interest rates have helped the economy regain some steam and spurred the stock market boom.
Many investors who piled into fixed income products, seeing them as less risky and less volatile than equities, may now feel like they've missed out on the action in stocks.
Adding to the misery, anyone who is in a fixed income fund with a longer duration is going to see near-zero, or even sub-zero returns for the last six months, Dyck said.
That's because the economy on the mend, inflation fears are rising and central banks are expected to start nudging rates higher. As a result, long-term bond prices have started to fall and yields rise, while stock markets may soon top out.
"There will undoubtedly be a sub-set of investors who when they see their one-year returns, say, 'oh my gosh, I'm at zero, I've got to yank out of there."'
"They're going to go ahead and make the same mistake they made one year ago."
Constant swinging between asset classes and adjusting to the micro-changes in the markets does not create long-term value for clients, Dyck said.
"We're trying to spend a significant amount of time getting out to advisers so that we can help investors and advisers maintain the discipline, as painful as it may be sometimes, to really stay focused on the long-term gain," he said.
Tina Tehranchian, a certified financial planner at Assante Wealth Management, a unit of CI Financial, said she didn't have many clients who completely panicked and bailed out of equities at the end of 2008. That said, many clients are coming to her looking to replicate the returns of recent years.
"You do see that a lot these days, especially people wanting to jump on the bandwagon when it comes to gold and precious metal funds that have been doing spectacularly well," she said from her Toronto office.
She said she stresses to those clients that they follow the big picture of their own personal financial plans rather than following momentum - making sure their overall asset allocation makes sense for the stage of life they're at and the risk tolerance they can handle.
"Where good financial advisers come in is giving that sense of perspective to their clients and trying to make sure they stick to their long-term plans and not get sideswiped, whether it be by bear markets or bull markets," she said. "Keeping fear and greed in check - they can both be dangerous."Report Typo/Error
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