In a survey by the the American Association of Individual Investors (AAII), last year, the average level of optimism recorded in the stock market was the seventh lowest it has ever been. The AAII survey started in July of 1987. Bullish sentiment averaged just 31.5%. There were only 12 weeks during all of 2019 when optimism was above its long-term historical average of 38.0%.
There is a difference between individual investors’ expectations for how the market will perform and what they do with their portfolios. Data from AAII’s monthly Asset Allocation Survey supports this.
AAII members have often kept more than half of their portfolios in stocks even when their collective optimism about the direction of stock prices was low.
This isn’t to say all individual investors are disciplined enough to avoid bailing out of stocks when their market outlook is dreary. Some do pull out of equities and only reflect the views and allocations of AAII members. The data from the surveys questions the use of terms like “smart money” and “dumb money.”
It is the much deeper pockets of institutional investors, hedge funds and other large investors constituting the so-called smart money that have a much bigger impact on the market’s direction.
Last year, AAII members maintained an above-average exposure to stocks even though their collective optimism was low. This occurred even though many expressed frustrations with Washington politics, uncertainty about the trade war and concern about valuations. Many said they paid attention to the trends in economic and earnings data. Also playing a role was monetary policy, including the ongoing low level of interest rates.
A simple reason explains why many AAII members have maintained their exposure to equities even when they aren’t optimistic about the prospects of stocks rising over the following six months. These folks are long-term buy and hold investors. While some do take tactical steps or otherwise adjust their allocations based on market conditions, it has been observed that many AAII members look past short-term fluctuations.
Why? I am so glad you asked!
There is a difference between expecting tougher market conditions and acting on those feelings.
Many refer to Warren Buffett’s advice of being “fearful when others are greedy and greedy when others are fearful.” Our evaluation supports this guidance. Opportunities to buy stocks arise when many others don’t expect them to do well.
While the link between unusually low and high levels of bullish sentiment and market performance is not causal, it can be a sign to look beyond what individual investors are doing with their portfolios and to consider the broader market and economic mosaic.
Ask what is occurring that would give individual investors reason to feel unusually cautious or encouraged.
The answer is: Check your asset allocation. See if it is still in line with your goals. If presently held investments are violating your investment ranges, it may be time to see if you should rebalance your investment portfolio.
Just so you know, I borrowed this article from AAII and did a little word smithing to it. I give credit where credit is due. It’s a good article if you understand Asset Allocation (along with Diversification) These are the most important words in investment.
If you have questions, send me at text or email to (916) 834-1206 or firstname.lastname@example.org. I get over 150 emails per day so a text letting me know you did send an email would be great.
R. LaMont W.