AAII Asset Allocation Survey: Equity Allocations at 2nd Highest Level Since 2007

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Individual investors increased their allocations to equities for the fifth time in six months. According to the January AAII Asset Allocation Survey, stocks and stock funds accounted for 63.5% of individual investor portfolios. This is the largest allocation to equities since December 2009. It is also only the second time since 2007 that AAII members have held more than 63% of their portfolios in stocks and stock funds. The historical average is 60%.

Fixed-income allocations fell for the fourth consecutive month. Bonds and bond funds accounted for 19% of individual investor portfolios last month, an 11-month low. The historical average is 15%.

Cash allocations declined slightly to 17.5%. Cash allocations have been close to this level during three out of the past four months. The historical average is 25%.

The rising allocation to stocks and stock funds confirms what we have seen in our sentiment survey. Optimism about the six-month outlook for stocks has been it above its historical average for 21 consecutive weeks. Fears that bond yields will be higher in the future are also playing a role. Several AAII members have said they are favoring dividend-paying stocks over bonds as a source of portfolio income.

This month’s special question asked AAII members if the increase in municipal bond yields has changed their sentiment toward bonds in general. The majority of respondents said that it didn’t because they were already pessimistic towards bonds. Current bond prices and worries about higher yields in the future were the most commonly cited reasons why. (Bond prices and yields are inversely related.)

Here is a sampling of the responses:

“No. I already recognized the bond area as a bubble waiting to burst. This development only reinforced my opinion.”

“No. I think bonds are very risky right now, with interest rates so low that they have nowhere to go but up.”

“I have been expecting it. I am very worried about municipals.”

“Yes, it fed my already cautious attitude. I expect rates to rise in general—if not this year, then next.”

“No. My situation is such that tax-free bonds are not an advantage to me.”

January Asset Allocation Survey Results

• Stocks and Stock Funds: 63.5%, up 1.2 percentage points
• Bonds and Bond Funds: 19.0%, down 1.0 percentage points
• Cash: 17.5%, down 0.3 percentage points

Asset Category Details

• Stocks: 29.5%, up 0.4 percentage points
• Stock Funds: 34.0%, up 0.9 percentage points
• Bonds: 4.8%, up 0.1 percentage points
• Bond Funds: 14.2%, down 1.1 percentage points

Historical Averages

• Stocks/Stock Funds: 60%
• Bonds/Bond Funds: 15%
• Cash: 25%

Charles Rotblut is the author of the new book Better Good than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio. The AAII Asset Allocation Survey has been conducted monthly since November 1987 and asks AAII members what percentage of their portfolios are allocated to stocks, stock funds, bonds, bond funds and cash. The survey and its results are available online at: http://www.aaii.com/assetallocationsurvey

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