With just one month left in the year, outflows from actively managed U.S. stock funds had already surpassed the record level of outflows during 2008. At close to $115 billion, outflows during the first 11 months of 2012 are already $6 billion higher than they were during 2008 and more than $14 billion higher than they were last year, which was the second-highest year of outflows on record (according to data provided by Morningstar Direct).
While actively managed U.S. stock funds remain in net redemption mode, index funds and ETFs dedicated to the category are on pace not only to surpass the level of inflows that were seen during 2011, but also post their best year since 2008.
With investors continuing to favor fixed income over just about every other asset class, flows into actively managed taxable bond funds had been on pace this year to surpass the record level of $330 billion in 2009, when investors jumped into both actively managed funds ($255 billion) and passively managed index funds ($36 billion) and ETFs ($38 billion) in response to the financial crisis.
more than $300 billion in net inflows into taxable fixed-income funds in a year when the market was up more than 15% is pretty astounding to us and highlights the aversion that many investors continue to have toward equities. All told, inflows into bond funds overall (which would include both taxable and tax-exempt fixed-income funds) is set to exceed $350 billion this year, compared with just over $400 billion in 2009. This compares with net outflows for more than $25 billion for equities--U.S., sector, and international stocks funds combined--during 2012, which is on par with last year's results and twice as high as flows in both 2008 and 2009.
So people are still piling into bonds. Are they wrong? Ambachtsheer says so (see Bylo's link above), but remember that he is primarily an adviser to (large) pension plans. To meet their objectives, these plans are pretty well being forced ionto taking higher risk. By contrast, individual investors' situations will differ widely. Risk that is acceptable to a pension fund manager may be unacceptable to an individual investor. It is the latter who is liable to panic during the next market downturn, doing significant damage to his or her portfolio.
ISTM that the role of bonds, in today's environment, is preservation of capital, not increasing one's net wealth. Remember that matching inflation does preserve capital, at least in a tax-advantaged account, smoothes out the ride, and is a great anti-panic medication.
It's also worth remembering that, in the twenty-five years from 1945 to 1970, in half of those years, real returns on government T-bills were negative. (That's how governments of the day solved their debt problems.) By contrast, we aren't doing too badly these days.