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Bad timing for some stock mutual fund buyers

October 29, 2009 |  5:50 pm

One group of investors must have been particularly relieved to see the stock market’s sharp rebound Thursday: The folks who jumped into mutual funds last week, giving stock funds their first week of net cash inflows since mid-August.

It looks like some of them might have waited, waited, waited -- and then barreled in just before equity markets took their biggest spill since early July.

As I’ve noted on many occasions over the last two months, individual investors have been ravenous for bond mutual funds since spring, while their interest in stock funds has waned as the market has continued to rally. The vote for bonds over stocks has been a strong sign of how risk-averse many people have remained since markets crashed last year.

In September alone, even as the Standard & Poor’s 500 index surged 3.6%, U.S. stock mutual funds had a net cash outflow of $11.2 billion, meaning redemptions exceeded new purchases by that amount.

By contrast, bond mutual funds had a huge net inflow of $47.4 billion in September. The data come from the funds’ trade group, the Investment Company Institute.

But it appears that some investors couldn’t resist the lure of stocks as major market indexes worldwide jumped to new one-year highs in mid-October. After nine straight weeks of net outflows, stock funds overall (domestic and foreign) had a net cash inflow of $1.68 billion in the seven days ended Oct. 21, the latest data available.

Foreign funds took in a net $2.9 billion in the latest period, the most since mid-June. Domestic funds had a net outflow of $1.2 billion, but that was the smallest outflow since mid-August.

Some of the new buyers (and would-be sellers who delayed) quickly were facing remorse: The S&P 500 reached a one-year closing high of 1,097.91 on Sept. 19. It then slid 5% in the seven following sessions through Wednesday.

The Russell 2,000 index of small-company stocks dived 9% in the same period.

The losses also were heavy in some foreign markets. The Brazilian market tumbled 10.5% from Oct. 19 through Wednesday; the German market slid 6.1%.

On Thursday, though, stocks resumed their climb on news that U.S. economic growth in the third quarter was stronger than expected. The S&P 500 rallied 2.2%, the Russell 2,000 jumped 2.4%, Brazil’s main index shot up 5.9% and the German market recouped 1.7%.

-- Tom Petruno