You have to feel sorry for Australia's fund managers. Well, sort of.
You see, unlike retail investors, fund managers have maximum and minimum limits on the sectors they invest in. As investors pour money into funds, the managers are forced to find a home for that cash, investing in the market – even if it's expensive.
With interest rates already at record low levels and likely to head even lower, more cash is being switched into asset classes that have higher rates of return. And that means cash is flooding into the stock market, particularly into dependable dividend yield stocks, including the usual suspects, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC), despite their expensive prices.
Many fund managers are also limited to investing in the top 200 or 300 ASX-listed stocks.
What could possibly go wrong?
While the music's playing, they have to keep dancing.
Retail investors, on the other hand, can choose to sit this one out if they want – don't have to invest in the market at all, or can pick and choose from a wider variety of stocks, including those outside the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
And should a market downturn come along, which it will, investors are quick to withdraw their cash, forcing fund managers to sell stocks at the worst possible time, and possibly at a loss, after being forced to buy stocks at high prices.
Retail investors can just sit on their hands and ride the downturn out, perhaps going against the tide, by wading into the market and buying up stocks on the cheap.
But without adjusting your thinking to think like a contrarian and buy when markets are going down, most retail investors will miss out on their big advantage.
Following the herd can be dangerous – especially when it reverses course. A much better idea is to chart your own course and use the advantages you have over other investors – especially large, professional managers – if you want to beat the market.
