Beware of journalists bearing big numbers.
Bloomberg and Marketplace reported on Friday that individual investors pulled an estimated $14.9 billion from equity and bond mutual funds in July, followed by another $9.7 billion in the first three weeks of August. The reports were based on a Credit Suisse research paper.
“Mom and pop are running for the hills,” a Bloomberg article declared. Marketplace's "Morning Report" stated that in July, the data showed that individual investors “were fleeing, en masse, to the relative safety of cash investments ... Mom and pop, in a sense, anticipated the mess” that financial markets became in the last week of August.
Is this true? No.
About those big numbers -- the $14.9 billion pulled from mutual funds by individuals in July. That seems like a lot, but it's a lot less in the context of the $12.5 trillion in individually owned mutual fund assets. So that seemingly massive July withdrawal from which Bloomberg and Marketplace drew big conclusions: It’s just a 0.1 percent move. Even adding the partial August data, a 0.2 percent withdrawal is not a mass flight from financial markets -- 99.8 percent of mom and pop’s mutual fund assets remained invested.
Finance tends to be full of big numbers, and as a general rule, for almost every big number, there is another, even bigger number it should be compared to. In this case, to make any sense of the data, you need to know how much was withdrawn and how much remained invested. Sure, the withdrawals happened. But they are so small that, in context, it’s impossible to know whether they mean anything.
It is odd, however, to see money leave both stock and bond mutual funds in the same month, let alone two months running (assuming data for the last week of August hold to the trend). The last time this happened was “the fourth quarter of 2008, kind of the darkest days of the financial crisis,” Dana Saporta, the lead author of the Credit Suisse report, told The Huffington Post.
Beyond observing that it happened, though, Saporta isn’t sure what it means: “I don’t know that this will continue or ever become more than just a statistical oddity.” If the trend continues, she says, we can start digging into meaning.
Saporta's reference to the 2008 financial crisis deserves some context, too. In that year, Americans withdrew a whopping $229 billion from stock mutual funds. In October 2008 alone, as Saporta shows in her report, investors pulled $87 billion out of stock funds -- a full 2 percent of assets. July and August 2015 are superficially comparable to late 2008: Both periods saw net withdrawals from both stock and bond mutual funds. But the comparison isn’t really that helpful, because it’s off, in terms of magnitude, by a factor of ten. Things that differ by a factor of ten generally aren’t that similar, and comparing them can be wildly misleading.
Even in the context of more recent withdrawals that weren't induced by crises, the moves of the last few weeks are teeny-tiny, as shown by this chart:
The bond fund outflows of late 2013 and the equity fund outflows of late 2012 both dwarf the recent data.
And net withdrawals only tell part of the story. Credit Suisse noticed that “Net equity mutual fund outflows have been limited to net withdrawals from domestic equity funds." The report notes that world funds -- specifically, international funds -- have been seeing net positive investment flows. According to data from the Investment Company Institute, the source that Credit Suisse uses, international mutual funds gained $20.1 billion in assets in July, after seeing around $12 billion in inflows during each of the previous three months, and positive inflows for every month stretching back to December 2012.
International markets have, of course, been even more volatile and bearish over the last week than U.S. markets have. Rather than avoiding August’s market turmoil, as the Bloomberg and Marketplace reports suggest, the granular stock fund data show that American mom and pop investors have been ever so slightly shifting their market exposure towards the heavily hit international markets. This shift accelerated a bit just before August’s craziness.
Business Insider’s Myles Udland wrote last week that financial journalism currently tends to avoid offering clear-cut explanations for market movements, and that any attempts to construct coherent narratives are “usually met with scorn.”
Humility may be in, and drawing strong conclusions might be out -- except, apparently, when the available conclusion is “little investors triumph in win rare victory over big, bad, volatile markets.”
Some conclusions, no matter how unfounded, are still too good to pass up.