The U.S. stock market, as measured by the MSCI US Broad Market Index returned 12.7% in 2016, with a powerful rally in the final weeks. Animal spirits seemed to be running wild.

As expected, fund cash flows followed suit toward the end of the year. In November and December, as stock prices raced ahead, investors plowed $69.6 billion into equity funds and ETFs. This amount marked the largest two-month net investment in equity funds since December 2014 and the seventh-largest two-month inflow in history. Investors favored U.S. equity funds, allocating $48.5 billion to U.S.-oriented portfolios, the largest two-month inflow on record.

These figures suggest that investors have developed a huge willingness to take on risk. That’s indeed the case. When roughly $70 billion jumps into the equity markets, risk appetite is keen. But a little context is in order. As a percentage of industry assets, rather than absolute dollars, these flows into both all equity and U.S. equity funds were about 0.8% of each group’s respective assets under management at the end of October. The inflows are big, but so is today’s mutual fund industry.

This combination of surging stock prices and rising risk appetite is a common pattern in investor behavior. It’s also somewhat concerning. It shows that these flows are not being used to rebalance investor portfolios.


Vanguard’s Risk Speedometers

We can also look at recent cash flows and risk appetite readings with a longer-term perspective.

My colleagues Don Bennyhoff, Yan Zilbering, and I developed Vanguard’s Risk Speedometers to gauge the level of risk investors are taking in a given period. It’s simply the difference between net cash flows into higher-risk asset classes such as stocks and lower-risk asset classes such as fixed income. The “speedometers” below compare investors’ current risk appetite with longer-term averages of risk appetite.

The December cash flows led to a spike in our 1-month reading of investor risk appetite relative to its average level over the past five years. Our 12-month Risk Speedometers, by contrast, is below both its level at the end of 2015 and its five-year average. The more modest 12-month reading tells us just how low risk appetite was through the first nine months of 2016.




This divergence between recent changes in risk appetite and longer-term levels of risk appetite is also clear in the table below, which presents those categories that experienced the highest inflows and outflows over the 1-, 3-, and 12-month periods ended December 2015. We calculated the winners and losers both in absolute dollars and as a percentage of the fund category assets.


Highest net inflows and outflows

Top winners

Risk Appetite Index - Top Winners - cash flow


Top losers

Risk Appetite Index - Top Losers - cash flow


A lens on behavior

We’ve long tracked industry cash flows to develop insights into what investors, collectively, are doing with a substantial portion of investable assets.1 Our Risk Speedometers and related cash-flow research also highlight trends that that may not be visible in raw cash-flow data.

The result is a nuanced picture of how investors are responding to developments in the markets. These nuances sometimes reveal that the reality of investor behavior is more complex than conventional wisdom suggests.


More to come

Cash-flow data are widely reported, but their interpretation can be complex. We plan to publish our Risk Speedometers regularly to provide additional insight into what the flows tell us. As we have done for some time now, we will continue monitoring investor behavior to highlight any trends or concerns.



1 According to data from Morningstar, assets under management for U.S. open-end mutual funds, money market funds, and ETFs totaled $17.7 trillion as of December 31, 2016.