click for larger chart

Source: Federal Reserve



Given yesterday’s Bonds beat Stocks discussion, I thought this chart might be worth reviewing. Its from the most recent Federal Reserve Flow of Funds Accounts of the United States (Q1 2012).

My thesis continues to be that the death of equity type attitudes are cyclical; When there is widespread equity exposure (“enthusiasm”) valuations tend to be higher and risk levels elevated.

Here we are, 12 years after the dot com crash, 5 years after the financial crisis, and equity exposure remains higher than any period before 1997 — but appreciably lower than the dot com years; exposure to equities is modestly lower than the housing boom period as well.

Note that 1974 was when ERISA laws created the 401k industry, and that could account for some of the 1974 to 2000 increase.

This metric is not a precise timing tool. The absolute level seems to matter less than sudden drops (1969, 1973, 2003, 2009) do. In that way, this operates like a psychology/sentiment gauge.

Category: Asset Allocation, Cycles, Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Equity Exposure as Percentage of Portfolios”

  1. krice2001 says:

    “Note that 1974 was when ERISA laws created the 401k industry, and that could account for some of the 1974 to 2000 increase.”

    I agree with that thought, Barry. Many of the people that work for me tell me that they’ve invested in one of our set-it and forget-it “retirement” funds that hold percentages of stocks, bonds, and a stable value fund that adjusts as the person ages. They wind up being invested in a relatively stable % of equities (they’re index funds) regardless of how the market performs.

  2. Frilton Miedman says:

    Would be interesting if you could smooth that chart with household debt as a percent of income, very interesting.

  3. jaymaster says:

    I agree, interesting. But I’m still trying to get my head around what it really means.

    Does this track the amount on new money going into portfolios? Or shifting money? Or just the overall relative value at a given point in time?

    If it’s the latter, then it seems that this chart would naturally be correlated to market valuations.

    For example, if I started with a 50/50 split, and the market went up 30%, bonds stayed flat, and I did nothing, I would end up with a 57/43 equity/bond ratio.

  4. perpetual_neophyte says:

    It might also be instructive to lay over a graph of the Fed Funds rate or 10-year Treasury yield (nominal or real). It may have been, to most investors, that a 13% bond in the late ’70s/early ’80s looked a lot more attractive than a 3% bond of comparable quality and duration. Also consider the idea that “cash is a guaranteed loser (on real terms)” today and CDs are practically in the same boat.

  5. nofoulsontheplayground says:

    Since the 2000 highs on that chart, the equity index levels seem to inform the % holdings through the lower valuation of the holdings more than the reallocation of the holdings.

    In other words, that chart since 2000 looks like a blended buy and hold NDX/SPX chart without much change in the holdings other than the valuation of the indexes. This is a bit too simplistic, but I thought it worthy of mention.

  6. kek says:

    After checking out this chart is it any wonder why so many investors do so poorly?

  7. bear_in_mind says:

    Nice observation on the ERISA influence! The irony of 401(k) type accounts is that they’re so poorly managed by most participants, and over-charged by so many of Wall Street’s custodial firms.

    Would be really interesting to know what the investor’s mix of stocks and bonds were during this time frame. Maybe overlay this chart with a trend line showing what the classic 60/40 blend of stocks and bonds would look like with the same net monies invested.

  8. Chad says:

    It would be more interesting to see the current time frame compared to the 20′s and 30′s.

  9. machinehead says:

    What this chart shows are portfolios held by the entire economy: individuals, trusts, corporations, pension funds, insurers — everybody.

    By contrast, S&P’s survey of pensions sponsored by the S&P 500 companies showed equity holdings of 48.4% and a fixed income allocation of 40.9% in 2011. In other words, big corporate plans are 10% heavier-weighted in equities than the public as a whole.

    Jeremy Siegel would say that’s a smart move on the part of corporate plan sponsors. Whereas Bill Gross says the cult of equities is ovahhhh …

    As a strategic timer, I’m completely agnostic. Long term, my portfolio averages about 60% bonds and 40% stocks.

  10. socaljoe says:

    What does this mean?

    I would think all shares in existence are in someone’s portfolio. Buying and selling only moves the shares from one portfolio to another… but they all remain in a portfolio.

    When is a share in a portfolio and when is it not?

    If the % equity exposure is only a reflection of the price level, then it conveys no information about investor sentiment.

  11. jonas says:

    I think this chart is a bit misleading because the value of equity has gone up a lot over the years. The big drop in equity % in 2009 is attributable to the fall in equity value more than lots of people exiting. Same with the rebound afterwards.

    It would be more interesting to compare now against the 80s in a way that doesn’t reflect the rise in value of equity since then.

  12. CANDollar says:

    socaljoe has a great point.

  13. ConscienceofaConservative says:

    Given that graph , it’s hard to say equities are under-owned. Another reason not be bullish.

  14. Greg0658 says:

    I’ll kick the last comment down the road .. the thread graph is compairing stocks vs bonds in the minds of investors

    the socialjoe comment I’ll tweek some .. yes a stock will always be in a slot/place .. but where ? is his point or maybe mine .. (dual compete’g supernovas)

    a bond must be repaid on request or a bankruptcy must be filed

    a stock must be sold to a willing buyer / if no willing buyer is found the price drives downward .. eventually the price should reach a point the corporation itself would buy it back taking itself more private … in this world where bonds deliver so little interest .. buyers exist for corporations that pay dividends / or else the shareholder is praying someone shows (someday / & stuck the muck)

    the point is WHY anything in stocks .. really .. in this day and age where the corporation decides everything > where in the big world to invest for growth + dividends or not + ceo pay packages + workcations + advertising + common labor pay + pensions + healthcare + all the other legal business deductions including buying elections and the laws that govern our lives

    answer is: growth promises and a dividend + with a storage bin that you can believe in
    question is: growth for WHO


    imo the QE#s are giving the illusion of growth so babyboomers can feel like a retirement is eventually do-able … in the meantime what’s really real is a job .. and we have lots of them / pushing paper around – but when the –it hits the fan and crunch comes to crunch we will see what matters .. laws smawlls

    in closing and keeping this pc .. possession is 9/10ths of the law – the other 10th is for lawyers to figure out – for a commission of 30% (if you win) if they are busy or don’t think you can win / well – that’s a deep subject (sometimes wet / sometimes dry)

    what a rucked up mess .. make a living pushing buttons from the countryside .. FCOL

    before submit “because the value of equity has gone up a lot”
    .. now that would be a chart – what do you think corporations of the world are worth to continue to payup demands to / or go into business & take them out as a competitor .. now thats a ROTFLOL

  15. Greg0658 says:

    I’d be remiss to not point out the PRIMARY directive of a corporation
    (because corporations are people to my friends)

    they KNOW money must be in the hands of a buyer or they cease to exist .. hense they understand BALANCE .. they just have to REMINDED *

    before submit: .. I was going to say * “let them feel starvation” .. but alas they are our food lot & energy

    the pc thing to say = the fix must be from within

  16. Frilton Miedman says:

    Relative to my comment on consumer debt relating to the ERISA laws and the impact on equity ownership, a record number of 401K’s had loans taken out against them, and defaults on those loans have begun to soar this year.