Financial planners and investment advisers apparently are doing their jobs well — their clients and other individual investors are diversifying their investments as never before.
That is the implication of the report in
InvestmentNews last week that said net new cash flows into stock funds have declined significantly since the all-time peak reached in January 2000.
Net flows into stock funds now average about $11 billion a month, down from more than $50 billion a month at the turn of the millennium.
Perhaps even more significantly, net new monthly flows into U.S. stock funds average $0, according to a study by New York-based Lipper Inc.
This is good news for U.S. investors, though probably less welcome at fund companies that concentrate on equities or offer a narrow range of funds. In fact, the movement away from equities likely will help large fund groups at the expense of smaller ones.
But the trend is good for the average investor because it suggests that individuals have broadened their horizons beyond equity mutual funds, and particularly U.S. equity funds.
They are making greater use of the full range of
investment vehicles, including life cycle funds, international mutual funds, exchange traded funds and
separately managed accounts.
The study showed that $12 billion a month flows into non-U.S.-oriented-stock mutual funds, suggesting greatly improved diversification of investors' total portfolios and therefore reduced portfolio risk.
While this is generally a positive trend, advisers should temper the enthusiasm of their clients for foreign stocks, given the strong results many foreign markets have experienced in the past two years, and the weakness of the dollar.
Investors should be discouraged from plunging heavily into foreign stocks now that many foreign markets are at or near multiyear highs. In addition, the time to buy foreign assets is when the dollar is strong, not when it is weak.
Some observers suggest that a good part of the money formerly invested through equity mutual funds now flows into ETFs. This can be positive or negative, depending on how investors use the ETFs.
ETFs are a cost-effective and tax-efficient way to invest in equities and gain broadly diversified equity portfolios. And ETF management fees are much lower than mutual fund fees.
But because ETFs can be traded like stocks, investors can abuse them. They may be tempted to jump into and out of the market too often, racking up trading expenses and reducing the tax efficiency of the vehicle.
Flows into life cycle funds and similar vehicles, which are being offered in 401(k) and other defined contribution plans, also are positive, according to observers, and may have deflected some flows from pure equity funds. Life cycle funds provide 401(k) plan participants with a means to invest systematically for their retirement.
So while individual investors appear to be getting more savvy about using the broad range of
investment vehicles available to them, the job of the financial planner and investment adviser isn't done.
Investors still need advice and guidance from financial experts about how and when to use these vehicles appropriately for their individual circumstances.
