$26.3 billion.* That's the dollar value of equity mutual funds that retail investors have liquidated in Canada since the start of 2011.
In the U.S., things are even worse. South of the border, a total of $266.2 billion* in equity funds have already been redeemed in 2011 alone. But that's not the scary part. The scary part is that so many investors are cashing in their equities at a time when stocks are perhaps the cheapest (relative to interest rates) they've ever been.
At first glance, this may seem like a classic case of aberrant behaviour. Unfortunately, despite the fact that we all claim to know better, the pattern of investors buying high and selling low is anything but new.
If you were to look back over the last 40 years and draw a chart tracking the highs and lows of market cycles, and then overlay another chart of equity mutual fund purchases and redemptions along the same timeframe, you would see a very disheartening picture.
Most mutual fund purchases occur in a feverish frenzy at the very top of a market cycle, when demand is high and prices are even higher. And as we're seeing now, most investors just as furiously sell their equity funds at the worst possible time, when the markets are at or near the bottom.
In other words, the lines on our chart are perfectly inverted to the way they should be, with the most redemptions at the bottom and the most purchases at the top. As an investment advisor, I have to ask the question: why? Why do investors continue to fly in the face of everything history has to teach us?
One argument I often hear is that the stock market is fixed, leaving little chance for the "little guy" to succeed. The only problem with this argument is that it simply isn't true. The market is, by definition, almost perfectly liquid. Stocks don't care whether you have $100 to invest or $100 million. They're for sale regardless of who wants to buy, or how much money they have.
As a result, there are no real barriers to enter the market. Unfortunately, there are also no barriers to making a bad exit, either. This is where, over and over again, the little guy sabotages his own investment life, by buying at the peak and selling in the valley.
If you were to randomly ask 100 average investors, and 100 Wall Street tycoons, the single most important secret to success in the equity markets, the answer you'd probably hear most often from both groups would be to buy low and sell high. On the one hand, it seems like the simplest, most basic piece of investment advice. Yet, in my experience, it remains one of the most difficult things for most of us to do.
Take the current situation as an example. We are either at, or very close to, a market bottom. The record-low valuations tell us this beyond almost any shadow of a doubt. Logic would therefore dictate that investors should be flocking to buy equities while they're still on sale at discount prices.
In reality, the opposite is happening. Thanks in no small part to the predictions of impending doom we're being fed nonstop by all those 24-hour news channels, the average investor has forgotten that valuation will always trump fear and bad press sooner or later.
Of course, not everyone has given in to panic. Warren Buffett - who called the stock market an incredibly efficient tool for the transfer of wealth from the impatient to the patient - recently announced that, after never buying a single share of his own stock in his 40-year career, he will now be buying back up to $28 billion of Berkshire Hathaway stock because the prices are just too good to resist.
This isn't to say that the declines we've experienced have no basis in fact. There will always be some crisis, some convincing list of woes that will make it hard for us to do what we know we should.
This is because it is hard. It's not easy to hang onto your stocks right now, let alone have the temerity to go out and buy more before they double or triple in value. As human beings, we are genetically imprinted with a desire to follow the pack, and do what we see others do around us.
We read our investment statements when they come in, and month after month, we see our numbers - our hard-earned life savings - getting smaller. Fear trumps common sense, risk wins out over opportunity, and the sell orders go in. The more sell orders go in, the more stocks drop, which leads to even more sell orders, and the whole vicious cycle begins all over again.
But if you can step outside of this downward spiral, just for a moment, there are a few important clues happening that just might suggest an alternative strategy.
Right now, professional investors and insiders are busy buying. These are the people who focus on valuation, not the headlines on last night's evening news. They know that stocks trading at eight times cash flow are a better investment than stocks trading at 15 times cash flow, especially when the alternative is a Treasury Bill paying one per cent interest.
So you have a choice to make. You can follow the herd, sell all your equities and stay on the sidelines out of the certainty that things will never get better, and stocks will keep going down until they hit zero. Or you can take the lead of insiders, professional investors like Warren Buffet, and some of the world's largest publically-traded corporations, and take advantage of what may well eventually be remembered as the greatest buying opportunity of our generation.
It won't feel good, mind you. Doing the opposite of what the crowd is doing never does. And the news will make you feel like a fool every day. That is, right up until the day they suddenly break the "surprising" news about the strong and sustained recovery, that no one could possibly have seen coming.
It may not happen tomorrow. It may not happen next week. But 200 years of history has proven that it will eventually happen. And when it does, all those "little guys" who got out of the market when it was at rock bottom will have missed the boat all over again.
The bottom line is, if you own stocks and equity mutual funds, and long-term growth is your objective, in my opinion, you're in the right place. If you have the means, you might even want to buy a few more shares.
After all, there's certainly no shortage of motivated sellers.
*All figures are obtained from Dimensional Fund Advisors, Canadian Business Update 2011.
Alan MacDonald an Investment Advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of "The Copperjar System, Your Blueprint for Financial Fitness" available on Amazon.
All material by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates.
Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.