Going With -- or Against -- Mutual Fund Flows

It's a popular pastime for many investors -- and journalists -- to look at mutual fund flows and use the data to extrapolate what the hot sectors of next year will be.

The problem is, of course, that predictions are never certain, and there's no rule of thumb. One pattern, however, does recur: Fund flows are generally a lagging indicator. By the time the individual investor notices a trend and reallocates his or her portfolio to chase the big returns, that sector is almost always near its high.

"We've found that fund flows lag what's going on in the market," says Scott Cooley, a Morningstar fund analyst. "In 2000, equity funds showed record inflows as the market steadily headed south. And it took people a couple of years of a bear market before they started yanking money out of stocks and putting it in bonds." ...