MONEY

Direct Stock Investment Hits All-Time Low

How are you dividing your pie?
Since 1987 the American Association of Individual Investors (AAII) has conducted a monthly survey on how we’re divvying up our money between stocks, bonds and cash. The AAII Asset Allocation survey breaks both stock and bond investments into two subcategories: the percent invested directly in a stock or bond, and the percent allocated to a stock or bond fund.

According to the most recent AAII Asset Allocation survey, the percent of direct investments in individual stocks is at an all-time low of 17%, nearly half the historical average of 31%. (By comparison, during the depths of the 2000-2002 bear market the percentage invested directly in stocks hovered in the vicinity of 25%.)

What’s interesting is that that the percentage in stock funds right now-27%-is pretty much in line with its long-term average of 29%. So what’s going on? The steadiness of the stock fund number is probably a function of individuals keeping up with systematic 401(k) investments; new contributions into stock funds counteracting to some extent the market losses in those stock fund accounts. As for the decline in direct stock investments, well, clearly we’re a bit less eager to commit new money to stocks.

None of that is too surprising, but what really caught my eye is the fact that the current 16% allocation into bond funds is double the historical norm, while the 6% allocated to direct investments in individual bonds is barely off its 7% historical average. If your goal is to increase your bond allocation and you’re only investing via a 401(k) and your 401(k) only offers bond funds, then you’ve got no choice in the matter. But if you do have the flexibility to buy bonds rather than bond funds, my colleague Joe Light pointed out in a recent article that direct investments in bonds can be the better route.

The knock against bond funds is that because a fund is constantly buying and selling bonds there is no guarantee that you will not lose money. If you instead own an individual bond and hold it to maturity, you will get all your money back (plus interest) assuming the issuer doesn’t go belly up. That doesn’t mean bond funds are bad. They are indeed a very viable option-especially if you have less than $100,000 to sink into the bond portion of your portfolio. But check out Joe’s article for tips on how to invest directly. It definitely takes more time and effort, but you gain the peace of mind that your fixed income allocation won’t lose money.

– Carla Fried

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