INDIVIDUALS ADDED TO EQUITIES IN SEPTEMBER DESPITE HORRID MONTH

By Charles Rotblut, CFA, AAII

Individual investors shifted portfolio assets back into stocks and stock funds, while keeping their exposure to equities below average for the second consecutive month. The September AAII Asset Allocation Survey found that individual investors held 57.8% of their portfolio in stocks and stock funds. This was a 2.5% increase from the prior month. Even with the increase, however, the allocation was below the historical average of 60%.

Bond and bond fund holdings declined to 19.3%, a 2.3% drop. Nonetheless, the current reading is consistent with the fixed-income allocations recorded by the survey throughout 2011. Furthermore, the allocation to bonds and bond funds remained above the historical average of 15% for the 28th consecutive month.

Cash allocations declined by 0.3% to 22.8%. September was the third time in four months that cash allocations were above 21%. The historical average is 25%.

Individual investors continue to struggle with a lack of attractive choices for short-term total return. Enthusiasm for Treasury bonds is tempered by historically low yields. Sentiment towards stocks has been negative, as the S&P 500 tumbled 14.3% last quarter. As a result, cash allocations are staying at their highest levels since the summer of 2010.

Last month’s special question asked AAII members what impact the Federal Open Market Committee’s decision to keep interest rates unchanged until at least 2013 has had on their sentiment towards bonds. A large number of individual investors expressed pessimism about the outlook for bonds, and many said they were either avoiding bonds all together or reducing their exposure. A smaller number described themselves as optimistic about bonds, noting that the Fed’s August announcement provided clarity. Some AAII members are favoring either short-term, corporate, high-yield or international bonds. A few expressed a preference for dividend-paying stocks.

Here is a sampling of the responses.

  • “I am negative about U.S. government bonds; the yield is practically nothing.”
  • “I am retired and rely on interest from bonds as part of my income. I hate the low rates. It is impossible to get moderate income at moderate risk.”
  • “I will be forced into more equities in a quest for better total return. A tough choice for one who is already retired.”
  • “(The Fed’s announcement) helped big-time to keep interest rates low and make investing in bonds a little safer.”
  • “I am looking at alternatives, including preferred stocks, variable annuities, intermediate corporate bonds and international bonds.”
  • “I am refinancing my home loan to lock in the lower rates.”

September Asset Allocation Survey Results:

  • Stocks Total: 57.8%, up 2.5 percentage points
  • Bonds Total: 19.3%, down 2.3 percentage points
  • Cash: 22.8%, down 0.3 percentage points

Asset Allocation details:

  • Stocks: 28.3%, up 1.1 percentage points
  • Stock Funds: 29.6%, up 1.5 percentage points
  • Bonds: 4.1%, down 1.6 percentage points
  • Bond Funds: 15.2%, down 0.7 percentage points

Historical Averages

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

Charles Rotblut, CFA, is a vice president of the American Association of Individual Investors. He is the editor of the AAII Journal. He authors the weekly AAII Investor Update e-newsletter and his commentary is published on both Seeking Alpha and Forbes.com.

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  • Andrea Malagoli

    The siren song of equities for the long term is live and well …