A CNBC article had this to say about investors in December:
Actively managed funds experienced outflows of nearly $143 billion in December, their worst month ever, according to data from Morningstar
Investors, at the same time, fled to cheaper passive strategies, with those funds reeling in nearly $60 billion in December alone, the data shows
Let me go over the headlines in plain English. Investors sold 143 billion dollars of actively managed funds, a record amount of sells for a month in December. At the same time, investors parked some of that money into passive investments such as index funds.
There are two warning signs:
Actively Managed Funds vs. Passive Funds
The only reason you want to be in actively managed funds is because they are as the name suggests - actively managed. The best actively managed funds are those that preserve capital to a degree versus losing as much as the stock market. If investors sold those types of actively managed funds and invested in passive funds, they just raised the risk level of their investments. That move would suggest that investors don't understand the real debate between actively managed and passive funds. If they sold actively managed funds that are trying to beat the market, then they made the right move because that type of actively managed funds is, generally speaking, taking the same risk level of passive funds.
Record amounts of sells of mutual funds in December?
If investors sold a record amount of 143 billion dollars worth of funds in December, what are they going to do if this is really a bear market? If this is a bear market, then there will be plenty of motivation to sell later. December was nothing! Mutual fund selling just adds fuel to the fire in a stock market decline.
I don't think that it is a bad thing for investors to have an exit strategy and sell. Having said that, December was a little too early to sell investments. After all, this might be just a correction and not the start of a bear market. If you are going to reduce risk by selling know what you are doing and have a game plan. It sure seems that retail investors don't know what they are doing.