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Just Go with the Flow
9/15/2025
Be greedy when others are fearful, and fearful when others are greedy.
Johannes Muller
Global Head of Research
Robert Bush
DWS Research Institute
IN A NUTSHELL
- The Federal Reserve has a rich, granular, and intuitive dataset called the Financial Accounts. They are used as a building block for the National Income numbers, but we invoke them for insights into the equity flow behavior of US Households.
- The data illustrates the equity culture of the US, but shows that the way in which America invests has changed very significantly over the decades, from almost entirely direct investments to a more balanced mix of direct and indirect.
- The relationship between quarterly equity market returns, and quarterly individual flow data, shows a strong negative association. Contrary to what many might ordinarily assume, individual investors tend to buy when markets are down, and sell when they are up. We applaud them.
The Amateur Mindset
When it comes to investing, it’s likely many think they are professionals, and not amateurs. And, regardless of their classification, they probably believe their strategies, timings, and approaches are stellar. In this brief note, we will evaluate one aspect of this claim, whether amateur investors, properly defined, tend to do the right thing during down markets.
To do that, we’ll need to clarify several terms, not least of which – what are amateurs, and what is the “right thing”? Fortunately, there is an extremely robust data set that we can use to help us answer these questions. The Federal Reserve has a voluminous set of information (see References) called the Financial Accounts (it used to be called the Flow of Funds Accounts) which are a building block of the National Income accounts.
The information is helpful for several reasons. Firstly, it is relatively granular, intuitive to use, and goes back a long way (to 1959 for the set we used), which enables us to build up a robust picture of behavior over several decades. Secondly, they helpfully break down wealth holders into three categories: households, nonfinancial businesses, and banks. It’s the first of these that we focus on. Finally, they break household wealth down into different asset classes, and, perhaps most usefully of all, the access method for the assets. So, for example, we will focus just on the equity component of wealth, and, specifically, that which is “directly held” by households, in contrast to “indirectly held.” This indirect category includes household investments in pension funds, insurance companies, retirement funds, and mutual funds. By excluding these, and focusing on the directly held equity wealth of households, we believe we have a very good proxy for self-directed amateur flow, i.e., the actions of individual investors.