This year has so far been a good example of investors doing the opposite of what they should when it comes to investing, as they are certainly not heeding Warren Buffet's mantra of buy in doom and sell in boom.
According to the recently released BetaShares Australian ETF Review for February, outflows from Australian ETFs caused the industry to fall for a second consecutive month. They also reported for the first time in the industry's history that the international equities category resulted in a net outflow and that new money inflows were at their lowest net figure in five years.
The report indicated that the results were partly due to falling global share markets, which I believe has caused concern for consumers about global economics and the much talked about potential for a stock market crash. Many investors also reduced their holdings in direct equities or exited the market based on similar fears.
Interestingly, the All Ordinaries Index closed just 6.57% lower than it opened in January and it closed just under 1% higher in February than it opened. While in March the market rose strongly back to where it started the year.
Given that the market didn’t unfold based on investor expectations, this created what is known as the herd mentality where the masses have acted out of fear. However, Buffet's quote about buying in doom is not about following the herd. Those who understand this would have been excited at the market volatility that unfolded in the first quarter of this year and would be waiting patiently to buy good stocks at better prices.
When the market is volatile, investors would be wise not to pay attention to what the masses are saying and instead do the opposite. If the taxi driver and your friends were giving out hot stock tips, then maybe it’s time to be wary about an impending stock market peak. But if they are all fearful of a stock market crash, it’s time to get ready to take advantage of some great buying opportunities.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au