Stock market warning! - Mutual funds at bullish extreme

 

“If you can find something everyone agrees on, it’s wrong” – Mo Udall

 

There is nothing more dangerous to your investment success than going along with an overwhelming consensus. While “groupthink” is highly seductive, and most of us are intellectually lazy, there are clearly times when it becomes far more profitable, or even a matter of survival, to go against the group. For many people this feels like choosing to become a social pariah and this alone makes it inconceivable. But choosing to stay with conventional belief, thoughts and opinion can sometimes be far more risky than most can imagine. 

 

Let’s get directly to why this might be the case now with your investments.  The chart below shows the level of cash holdings in aggregate held by mutual funds. In general mutual funds stay heavily invested, but they do nevertheless choose the level of cash that they hold at any time. There are times when they feel so confident about the market that they hold as little cash as possible (typically when the market feels so good near the highs) and just 4% of assets are in cash. There are also times when they are so lacking in confidence that they will tend to hold much higher levels of cash (typically when the market is near a bottom) and as much as 12% of the fund is in cash.

 

 

As you can easily see this chart shows the near perfectly wrong record that mutual fund managers have had in aggregate over the last 40 years as regards their market view. It also shows that once again we have reached the highly dangerous 4% cash level, which is clearly at an extreme on this historical measure.

 

Summary

 

Investors need to be highly careful about the stock market at the current time. Sentiment has now become extremely bullish. Mutual fund cash holdings are just one indication of this, but they seem to have a perfect record in calling a top.

 

Given the performance of mutual funds over many years do you think it might be time to review the mutual funds you have in your portfolio and improve your returns?

 

 

 

 

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