Technical Talk: Individuals have below-average allocation to equities

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The comments below were provided by Peter Green of Fusion IQ.

The chart below shows the deviation in stock holdings by individual investors above or below their 22-year mean allocation of 60% to stocks. The chart is constructed with data from the American Association of Individual Investors (AAII) Asset Allocation Survey, which routinely surveys its user base to determine their current mix of stocks, bonds and cash. When investors are too far above or too far below this mean, it suggests either a depletion of investible cash or a large build-up in investible cash levels. When investors deplete their investible cash levels, stocks tend to top as there is no buying power left. Conversely, when investors build up large cash levels, stocks tend to bottom and rally as plenty of buying power exists.

Even with the current rally investors are still a few percentage points below their 22-year mean of 60%. While investors’ commitment levels to stocks remain this low (i.e. below the 22-year mean), it is hard to expect a major sell-off of any significance.

Additionally, the most recent AAII Bull/Bear Sentiment Survey only recorded 38.62% of its respondents as being bullish. With bullish sentiment, both measured and anecdotal, remaining cautious and skeptical, the sentiment backdrop continues to support higher prices for equities.


Source: Peter Green, Fusion IQ, November 16, 2009.

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1 comment to Technical Talk: Individuals have below-average allocation to equities

  • It would be interesting to see where the mean would be if you looked at it in a longer-term historical context. Or, if we look forward, will there be a “new average” in the future after behavioral adjustments in the wake of bad equity experiences?

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