Are small investors giving up on Wall Street? After a decade of negative equity returns, multiple asset bubbles, one major market crash, one “flash crash” and what looks more and more like a casino run by the banks for the banks, the small investor is becoming increasingly turned off by the prospect of putting their hard earned money in the equity market. This was apparent in this month’s AAII allocation survey where small investors reduced their equity exposure by almost 10% to 50.9%. Cash holdings and bond holdings jumped and remain historically high according to AAII:
“Individual investors held 50.9% of their portfolios in stocks and stock funds according to the May 2010 AAII Asset Allocation Survey. This is a 9.5 percentage-point drop from April and the smallest allocation to equities since May 2009. The historical average is 60%.
Bond and bond funds accounted for 25.5% of individual investor portfolios. This is the highest allocation to fixed income since the survey started in November 1990. The percentage of portfolio dollars held in bonds and bond funds rose 5.1 percentage points from April. The historical average is 15%.
Individual investors kept 23.6% of their portfolio dollars in cash, a 4.4 percentage point increase. The historical average is 25%.”
According to Charles Rotblut at AAII investors are focusing more on the return OF their capital than the return ON their capital:
“Individual investors placed a greater emphasis on return of capital last month because of the volatility in the stock markets. The movement of portfolio dollars out of equities and into bonds/bond funds and cash corresponds with the latest AAII Sentiment Survey, which showed bearish sentiment at 50.9%, the highest level of pessimism recorded since November 5, 2009. (Bearish sentiment is the expectation that stock prices will fall over the next six months.)”
Are small investors beginning to shun the equity markets? I think that’s highly doubtful as greed tends to be as American as apple pie, but this is a clear sign that investors are becoming less and less likely to leave their money in the market for extended periods of time – thus adding to increased volatility.
If the volatility in the business cycle has increased and increased (failing) government intervention is making the markets more recession prone then we could be on the verge of a renewed de-risking on Main Street. The last two major bear market bottoms occurred when small investors capitulated at the 42% equity allocation level. If history rhymes we’d be wise to keep an eye on this level. The bullish contrarians in the crowd could also argue that the small investor’s low level of allocation is a very bullish sign as equity allocation is still well shy of its past levels seen at market peaks. The obvious question then is whether this is a renewed bear market or a correction within a bull?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.