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It is utterly predictable: when markets tumble, investors flee in droves. In September, net redemptions in Canadian mutual funds hit $4.5 billion dwarfing the previous peak of $1.7 billion set in April, 2003. While most of those redemptions were in money market funds, investors pulled out close to $2 billion from equity and balanced funds — still, a new record.
Fast forward to October and the redemptions turned into an avalanche. The Investment Funds Institute of Canada estimates the net redemptions of mutual funds in October to be between $8.2 billion and $8.7 billion. The bulk of the redemptions — more than $6 billion — were in long-term funds.
Some investors may have been spooked by the panic in the market, even though their own holdings didn’t do all that badly. Rob Carrick wrote about one such investor who redeemed his fund despite its relatively good performance:
Norman Bambrick, a 72-year-old retiree in Port Perry, Ont., was part of the wave in mutual fund selling last month. He bailed out of his bank fund after seeing his $200,000 investment in two accounts take a $12,000 haircut in 10 months. “The funds didn’t work out for me and I cashed them,” Mr. Bambrick said.
He now has most of his savings in guaranteed investment certificates and bonds.
As he watched the unit price of the bank fund plunge, he also worried about the security of his investment.
“I had a feeling that they were headed for a disaster,” he said. “I had no confidence in them.”
The October redemptions may or may not mark a bottom because future months could turn out to be far worse. But we can be sure of one thing: when this is over, we’ll find that investors picked the bottom by selling the stocks at precisely the wrong time.
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17 responses so far ↓
1 Nurseb911 // Nov 5, 2008 at 9:40 pm
6% decline in 10 months? I think that goes to show you that investors (and advisors) didn’t appropriately recognize their risk tolerance no matter the market conditions. I think most investors, even retirees, would be happy with a haircut of that much in comparison to what the rest of us (equity heavy) investors have endured.
2 Phil S // Nov 5, 2008 at 10:31 pm
The only equities that I’ve been buying with new money through this meltdown are index funds in my employer’s defined contribution pension plan. The curious thing is that my index funds are actually segregated funds - which I hated initially - but now that the market has suffered a major meltdown, it doesn’t seem so bad. If I need to draw from that pension plan before the market recovers, then the insurance company that backs my seg funds has to cover me so that I at least get my principal cash back. So far to date, my defined contribution pension fund is down about 25%, but I still there is a lot more pain before things get any better… I am still more than 15 yrs away from eligible early retirement, so chances are that the market will come back before I retire anyways… But I still feel comfortable that I am getting all of the market’s upside potential with my principal protected. On the other hand, I’m sure that someone working at the insurance company which is managing my pension fund might be sweating bullets as they can at the very least kiss their Christmas bonus goodbye this year, or at worst they might be out of a job by New Year’s.
3 moneygardener // Nov 5, 2008 at 10:54 pm
So market timing is possible….
4 ETF2X // Nov 6, 2008 at 5:13 am
Market timing is possible if you have a reliable signal generator. Going on gut instinct, however, is a different story.
FJP
5 Canadian Capitalist // Nov 6, 2008 at 7:34 am
MG: It is hard to say when net redemptions reach a peak in real time. Things may improve in November but December might be worse than October. We’ll only know for sure when this is well behind us but by then, you won’t need mutual fund redemptions to find the market bottom — a simple chart of the TSX would be all you need.
6 Jason // Nov 6, 2008 at 7:51 am
Why bail from money market funds? That is where most of my money is at the moment, and it seems to me to be a safe place to keep it as I will at least retain the capital.
7 A.J. // Nov 6, 2008 at 8:32 am
That 72 year old fella should never have been in stocks in the first place. He wasn’t cut out for it. After just ten months he bails. Stocks are a long-term hold.
8 moneygardener // Nov 6, 2008 at 9:31 am
In reality, the large majority of investors should not be hurt by a market crash. As long as everyone is allocated responsibly (big assumption), then the crash is probably a net positive for most, especially the young.
9 Thicken My Wallet // Nov 6, 2008 at 10:38 am
Sadly, the next time this happens we will see the exact same behaviour.
10 Dividend Growth Investor // Nov 6, 2008 at 10:56 am
When they are crying you should be buying.. When they are yelling you should be selling….
11 nobleea // Nov 6, 2008 at 11:59 am
When they are tanking, you should be…spanking?
12 Canadian Capitalist // Nov 6, 2008 at 12:07 pm
I agree with Thicken. In a recent post, Tom Bradley highlighted this snippet from a Jeremy Grantham interview on his Steady Hand blog:
Do you think we will learn anything from all of this turmoil?
We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.
13 Weekend Investing Reading (WIR) | Investing School // Nov 7, 2008 at 10:31 am
[...] the recent market turmoil, Canadian Capitalist sights that investors are fleeing the stock market. No surprise since investors never learn! They always sell low and buy [...]
14 Coldcall // Nov 8, 2008 at 5:06 am
I found it hard to keep my head in October. But I think its really important to stick to ones fundamentals. During the great market slides in october i bought into Aecon (ARE) because after doing a lot of research i picked them out as the most recessionary proof stock on the TSE. However, i was dismayed that as october wore on and while other stocks advanced somewhat during rallies, Aecon went sideways or even dropped at one point to below $6. I really started thinking i had made an enormous blunder.
But finally, when Aecon reported their last quarter on Oct 29th, which was a record in revenue, profit, billions in signed backlog, and a much rosier outlook compared to other sectors, i felt vindicated! ARE shot up as it should, reaching almsot 9 before we had the recent dip of a couple days.
But what was interesting was watching people dump Aecon at stupid prices. They must have lost loads of money and had they waited just a little bit they could have enjoyed the ARE turnaround.
In any case, to cut a long story short. If youve done your homework, stick to your guns! I find this October’s blood letting has been a great education in the stock market.
15 Shaodx // Nov 8, 2008 at 7:50 pm
Contrary to logic and to their own stated intentions, most people prefer to buy stocks high and sell low… go figure…
16 why buy stocks // Nov 16, 2008 at 4:34 pm
If the companies sometimes deliver untruth data, or ‘cook the books’ which is almost common to every public company, why invester buy stocks, even most of the company either cut the dividant or never pay the dividant?
The only goodwish is to sell the stocks to next victem at higher value.
question:
1.Is there any trust worthy company?
2.How to prove stock market investment is not a gambling ?
The end can’t justfy the means.
17 Canadian Capitalist // Nov 17, 2008 at 2:25 pm
Investing in stocks (remember that I always mean the broad market or a broad cross section of stocks, not one individual stock) is not gambling because you expect to make money through dividends and earnings growth over the long term. That’s not true of gambling which is set up so that players can expect to lose. It is unfair to say that most companies are “cooking the books”. Of course, some are but out of the thousands of listed stocks in the US, the percentage of companies involved in wrong doing is very small.
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