The Crowd is Often Wrong
Last week I touched on the immutable truth that humans are bad at timing the stock market. This week I’ll point out that they are similarly terrible when it comes to timing the bond market.
The chart on the left tells us that in September of 2021, a record $33 billion flowed into municipal bond funds and in June of 2022, $52 billion flowed out of those very same funds. For reference, in September of 2021, the 5-year Treasury was below 1% and in June of 2022, it was over 3%. In other words, investors collectively bought when the bonds were near their most expensive, saw their account values decline as interest rates went up, and sold after bond values became more attractive.
To buy near the top and sell near the bottom in any market is human nature.
This explains why municipal bond returns are, on average, nearly 500 basis points higher in the 12-months following the periods with the most outflows (when investors were the most scared) relative to the periods with the most inflows (when they were most optimistic).
Buying when greedy and selling when scared is never a good strategy. Investors that instead choose to act consistently on a long-term strategy can avoid these mistakes and are more likely to achieve better returns as a result.
When it comes to writing about investments, the disclaimers are important. Past performance is not indicative of future returns, my opinions are not necessarily those of TSA Wealth Management and this is not intended to be personalized legal, accounting, or tax advice etc.
For additional disclaimers associated with TSA Wealth Management please visit https://tsawm.com/disclosure or find TSA Wealth Management's Form CRS at https://adviserinfo.sec.gov/firm/summary/323123