Take a look at the chart below showing flows into bond funds from 2009 through 2012. Billions of dollars poured in, year after year.
Equity and Bond Flows 2004 – 2013
Meanwhile, despite five-in-a-row positive years for U.S. equity markets, investors fled stocks until the bond market turned sour in 2013, with a 15.1% decline in 30-Year U.S. Treasuries.
Past performance is not a guarantee of future results. Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. In general, fixed income securities with longer maturities are more sensitive to these price changes and may experience greater fluctuation in returns. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets) and loss of principal.
Now many of these same investors (and their advisors) are shifting into equities hoping the bull market will continue.
Chances are they may panic at the first signs of a serious downturn and begin a new cycle of buying high and selling low.
While even a well-planned portfolio can have losses in certain market conditions and even market timers sometimes get it right, much of this emotionally-driven behavior that may have negatively affected client investments could have been prevented — or at least mitigated — by financial planning.
Instead of focusing on aspects that can be controlled, such as creating a prudent investment plan, managing behavior and spending more time with clients, many advisors try to prognosticate and time the market.
By focusing on the one thing they can’t control — performance — these advisors can do a disservice to themselves and their clients. Beating the market is tough, and even professional money managers have a hard time doing it consistently and reliably.
Unfortunately, clients are usually the ones who suffer most when advisors try to outsmart the market but don’t succeed.