What Are Investors Up To?

Barry Glassman, CFP®

Individual investors continue to move out of stock and stock funds  and are now heavily underweight equities in favor of bonds according to the American Association of Individual Investors.  Allocations to stock and stock funds fell 3.4% to 53.1%, while allocations to bonds and bond funds increased 2.3% to 21.3%. The remaining 1.1% found its way to cash, which currently stands at 25.7% weight.

Growing pessimism is also reflected in recent mutual fund flow data from the Investment Company Institute (ICI).  In the past six months through October, investors pulled $122 billion from equity mutual funds, with nearly all of that coming from domestic equity funds.  Foreign equity funds experienced outflows of “only” $7.5 billion.

Naturally, money is flowing into the relative safety of cash and fixed income funds.  During the same six-month period, bond funds picked up $61 billion.  Bonds continue to receive favorable treatment from investors, despite the fact they allocated more than $620 billion into bond funds in 2009 and 2010.

November is proving no different.  Another $12 billion fled equity funds through November 22, while $20 billion found its way into fixed income funds.

Interestingly, Institutional investors and asset managers gradually became more optimistic and are taking a slightly different tact.  Despite market volatility and headline risks, a Reuter’s poll of US asset managers found the average allocation to equities increased 2.6% to 63.7% in November.  Bond allocations shrank 2.7% to 29.3% during the month.

They may have cause to be optimistic.  Data from the Stock Trader’s Almanac shows that December is the single best month of the year for the S&P 500 since 1950, and the second best month of the year for the DJIA.  With an average gain of 1.7% for both indices, holiday cheer appears to overtake the markets and encourage a holiday buying spree.

Only time can tell if this will be another holiday season to celebrate.  Given the typically inaccurate positioning of individual investors and ability of institutional investors to position ahead of rallies, it may be time to bet on black this holiday.  Of course, the lingering crisis in Europe does little to soothe frayed nerves this year, so investors not prepared to endure the volatility should probably watch this one unfold from the sidelines.

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