To be successful as an investor, it is important to grasp certain basic economic principles including the law of supply and demand. As inflows and outflows are reported within the mutual fund and exchange traded fund industry, the average investor should start to pay closer attention to these numbers when it comes to making their portfolio decisions.
Evidence strongly suggests that watching inflows and outflows can quickly demonstrate that the average investor chases performance. How many people have bought at the top of the market and tend to sell at the bottom of the market? Or they end up being a day late and dollar short when it comes to making the right investment decisions. Examining these inflows and outflows can help you spot raw trends of where the mass money is moving and may also present you with opportunities in certain asset classes that may become undervalued.
What is decidedly more important than watching the macro trends of money flow into mutual funds and exchange traded funds, is watching the flow of money in and out of the particular fund where you have your money invested. Mutual funds that tend to perform well will draw greater net inflow of assets and those that perform less well will draw greater outflow of assets. Depending on the size of the mutual fund, it may become more difficult for the existing manager to sustain performance if fund flows are abnormal on either side of the equation. Think about this for a minute. It will be difficult for a fund manager to stay fully invested if investors are constantly requesting redemptions. So, how will they maintain top performance?
The average investors should keep a watchful eye on the flows to keep track of the overall trends in the market and what is happening the funds they are invested in now.
Written by: Ted Jenkin
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