You sell your stocks (asset class: equity) and someone buys it and gives you cash; then you go and buy treasury bonds (equity class: government bonds). Money flow out of equity into U.S treasury, otherwise known as "flight to safety."

> You sell your stocks (asset class: equity) and someone buys it and gives you cash;

OK, let's write it out:

Before

  Person1:  Has $100 cash.
  Person2:  Has equity worth $100
  Person3:  Has Tbond worth $100

After "you sell your stocks"

  Person1:  Has equity worth $100
  Person2:  Has $100 cash.
  Person3:  Has Tbond worth $100

After "you go and buy treasury bonds"

  Person1:  Has equity worth $100
  Person2:  Has Tbond worth $100
  Person3:  Has $100 cash.

Now quantify the "money flow" for us.

You're right that the article should have been more clear - it's looking at retail investors specifically (in your example; Person2), which is the audience that FutureAdvisor focuses on. It's not focused on other actors in the market such as Institutional Investors, Hedge Funds, etc (you could see those other actors as Person1 and Person3, in your example). You are completely right that if you don't look at the market from any individual perspective there is no inflow and outflow, especially if keeping money in cash is still counted as "in the market".

If we say Person2 is the aggregate of all retail investors, then you have money flow. Person2 in your example has a $100 outflow from Equities and a $100 inflow to Tbonds.

The reason we chose to focus on retail investors and look at money flow from their perspective is to focus on a phenomenon that we see among individual investors, that of moving their money around in the market based on perceptions of the near future, and showing that the data shows this doesn't work.

I realize that I didn't explain this part fully. Any asset aside from cash is speculative - and is primarily determined by how much a person's willing to buy and sell it for.

So when AAPL is worth 500 billion or whatever in one day, it doesn't actually mean that AAPL can be converted into cash wholesale for $500 billion dollars - it means that for that particular day, the small percentage of trading involving AAPL shares determined that people were willing to pay for XX amount of dollar/share for the stock and multiply that by number of outstanding shares => we get the market's valuation of AAPL at that particular moment of the market's condition of supply and demand. However, in the hypothetical scenario in which Steve Jobs foundation owned 100% of AAPL and decided to have estate-sale, the market dynamics of dumping all shares of a stock onto the market is equivalent of oversupply of the stock to sell and not enough buyers, and therefore driving the stock price down.

So suppose in the "flight to safety" scenario, the equity market is shaky for whatever reason: unrest in middle east, euro crisis etc. The demand for equity is less, therefore what I paid originally for SPY (S&P500 tracking index) may be $100, but the highest someone who wants to buy it from me might be $80. But I sell it anyways because I'm driven by fear that the market's going to deteriorate further. With that money, I have only $80 worth of buying-power.

On the flip-side, as everyone's getting out of the equity market, they rush to the government bonds market as this is the safest investment. The demand for treasury bills suddenly goes up, therefore to buy your bonds; you have to be willing to buy them at a higher price than the next guy. So if I want to buy the same number of bonds previously of value $100, I have to spend now $120. So you see how now the bond market taken at wholesale is valued more.

So in your scenario, flight of safety goes like this:

Person 2: Sells equity of original value of $100 for $80 to person1

Person 1: Then has equity valued at $80 at the time

Person 2: Buys $80 worth of bonds from person 3 and now has Tbond worth $80

Person 3: Sells bonds of original value of $100 for $120; a portion of which goes to person 2

Thanks for the explanations!

So how would you now quantify money flow with your example?

What about the value of the equity? The equity's worth is not fixed; it's set by the market. So, if Person1's equity is now worth double, how does that change your scenario?

Good question. The inflow/outflow data is from the ICI (Investment Company Institute - a consortium of fund companies) and is dollars in/out which is independent of asset performance.

The x-axis actually shows the flow of cash into mutual funds in the given sector, which we take as a proxy for investor belief in the value of investing in that sector.