Net Equity Fund Cash Flows vs. S&P 500 Index Performance

Chart of the Week for May 23, 2008 - May 29, 2008

Market timing is a difficult task in any period. In fact, a famous study by Nobel laureate, William Sharpe, stated that market timers had to be correct over 70% of the time when predicting market swings to match the returns of a passive investor. To get a perspective on the success of market timing, we examined monthly equity mutual fund net cash flows as reported by AMG Data Services and the monthly returns on the S&P 500 Index. Positive net cash flow means more money is buying into equity funds than selling and negative net cash flows is the opposite. Is net cash flow positive when the market is going down (buy low) or when the market is going up (buy high)? Is net cash flow negative when the market is going down (sell low) or when the market is going up (sell high)?

Too often it appears that cash flow is following the buy high sell low path. The natural inclination to flee equities in times of negative performance is evidenced by the negative cash flow in January, July and September of 2001. More recently, January 2008 saw a similar occurrence. Conversely, positive cash flows to equities largely occurred in times of positive index performance; 2003 to early 2007. The historical measure above provides evidence that many investors time the market to buy high and sell low. A long-term investment strategy requires patience and discipline. Consider your long-term strategy when short-term jitters raise anxiety levels.

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

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The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment returns and principal value will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data illustrated. For performance data current to the most recent month end, contact ICMA-RC Services, LLC by calling 1-800-669-7400 or by writing to 777 North Capitol Street, NE, Washington, DC 20002-4240. Para asistencia en Español llame al 1-800-669-8216. Performance data current to the most recent quarter end is available by visiting www.icmarc.org.