Why Investors Poured $800 Billion Into This Fund

Steve McDonald By Steve McDonald, Bond Strategist, The Oxford Club

Slap In The Face Award

Transcript:

The uninformed little guy gets the cheek smacker this week.

It’s a kind of perverse slap, too. It’s actually an opportunity for the informed little guy to make a fortune on the less informed little guy. Very shark-like, I know.

For the past three years, Vanguard has taken in eight times as much money from investors as all its 4,000 competitors combined.

Think about that number for a second… more than 4,000 competitors combined.

And most of that money went into index funds. And its S&P 500 index fund has been the most popular one by a huge margin.

And that’s the good news. Well, for some of us that’s good news, and for some, as always, it’s bad.

Here’s the bad news…

The small investor is the guy buying most of these ETFs…

The same guy who will sell as if Vanguard carries the plague when the market turns (and it will).

He’s also the same guy who consistently buys at the top and sells at the bottom.

In fact, all of the buying since February 2014 has been at all-time highs in the market. Nothing new there! This is what he always does.


I don’t think there has ever been so much money in one place – put there by investors whose behavior is as predictable as that of the small investor – as there is right now in the Vanguard 500 Index Fund.

So when the next sell-off and the panic-selling it drives starts, and it will, an unusually large percentage of the irrational selling will be directed at that index.

That means the S&P will be in the direct line of fire of the little guy’s long history of buying high and panic-selling low – usually at the bottom.

Which means, if you’re prepared for it, this next sell-off could be the biggest and simplest buying opportunity of our lifetimes. It might be as easy as waiting for the little guy to dump his S&P ETFs.

Now, do I know with absolute certainty that the market will sell off and the little guy will lead the charge out of the ETFs he has been buying at all-time highs in the market?

You’re darn right I do! I guarantee it, and you heard it here first!

This one is screaming, “Keep some money on the sidelines.” Or, at the very least, make preparations to ride out the next sell-off and the next… and the next. You get the idea.

I hate to use a classic line, but this could be the best of times and the worst of times. The question is which side do you want to be on?

The little guy panic-selling is one of the absolute truths of the market. Bet on it!

Good investing,

Steve