Investors currently seem scared of everything.  Stock market volatility, earnings, Fed policy, energy prices, China’s economy, terrorism, politics, Britain leaving the EU, and inflation are just a few of the many issues keeping investors fearful.  This short-term market myopia seems like an opportune time for longer-term investors to take more risk.
Over longer periods of time, returns compensate investors for taking risk.  Although everyone is schooled on the concepts of risk and return, investors rarely take advantage of opportunities that might enhance long-term returns because they are too scared to do so.  Instead, they cling to past performance believing historical outperformance will continue indefinitely.

Investors tend to be most bullish at the peak of a cycle when they are most confident.  Chart 1 shows that investing with such confidence has historically led to significantly inferior returns.  The chart compares the 20-year performance of various assets classes to results of the Dalbar study of individual investor returns.  Dalbar estimates individual investor returns based on the timing and magnitude of mutual fund flows.  Their data suggest that individual investors perform poorly over longer periods of time because they tend to buy when they are most convinced in an investment’s merit and asset prices are elevated, and sell when they are least confident and asset prices are depressed.  In other words, individual investors tend to buy high and sell low.

Source: Richard Bernstein Advisors LLC., Bloomberg, MSCI, Standard & Poor's, Russell, HFRI, BofA Merrill Lynch, Dalbar, FHFA ,FRB, FTSE.  Total Returns in USD.  Average Investor returns are represented by Dalbar's investor returns which represent the change in total mutual fund assets after excluding sales, redemptions and exchanges.
The search for income: demographics or fear?

Since 2008, there has been a considerable shift within investor portfolios toward income and away from capital appreciation.  Many observers believe demographics and the need for retirement income have caused this shift.  We don’t doubt that some of the shift from capital appreciation is attributable to aging demographics, but a broad range of data indicates that fear may be the instigator.  Today’s investors generally believe that investing for income is safe whereas investing for capital appreciation is risky. 

Chart 2 shows cumulative mutual fund flows over the past several years.  There have been positive flows into income-oriented funds like utility funds, REIT funds, and preferred stock funds.  However, there have been significant outflows from capital appreciate-oriented funds like small, mid, and large growth funds.  Investors believe that income-oriented funds are safer.

Source: Richard Bernstein Advisors LLC,  Morningstar

Unfortunately, the idea that income-oriented investment strategies are safer than capital appreciation strategies isn’t quite true.  Any strategy taken to extreme can become very risky.  2015’s debacle in MLPs (See Chart 3) starkly demonstrated this point.  Income-hungry investors were so convinced that MLPs were infallible that they ignored that the industry had become free cash flow negative, which is never a good sign for companies underlying an income stream.

Source: Bloomberg Finance L.P.  For Index descriptors, see "Index Descriptions" at end of document.