One of the key questions faced by investors today, a year after the markets were at their worst, is how safe it is to go back in the water. Given that bonds have turned out to be a better bet than stocks over the past 20 years — and given the steep decline and perhaps shaky rebound in the equity markets — is it time to reassess the primacy of stocks in our portfolios? Will we be better off with the security and steadiness of bonds?
A great answer to that question came last week from Charles Schwab chief investment strategist Liz Ann Sonders.
Presenting her outlook on the economy and the markets to a group in New York City, Sonders spotlighted what appears to be a powerful contrarian indicator — that is, measure of how the investing herd is zigging in the market, giving a wise and brave investor a roadmap of where to zag.
The contrarian indicator in this case is a monthly asset allocation survey run by the American Association of Individual Investors, a nonprofit focused on investor education. Since November 1987, AAII has been asking its members for snapshots of how their own investments are distributed — how much of their wealth is in stocks (and stock funds), bonds (and bond funds) and cash (or cash equivalents, such as money-market funds).
In that historical record are some fascinating tidbits. Looking back in the archives (accessible with an AAII membership priced at $29 a year), Sonders found that the time at which investors devoted the the highest share of their portfolio to stocks was in early 2000, when AAII respondents had more than three-quarters of their money in stock.
You remember what else happened around then, right? The S&P 500 Index shot past 1,500 — only to begin a two-and-a-half-year slide down to 800. The Nasdaq’s slide from its giddy, early-2000 heights was even more devastating.
When did cash hit its peak allocation in the AAII survey? That would be last March, Sonders learned, when people had 45% of their wealth in the green stuff.
Has cash proved to be a good place to have your money since then? No, it hasn’t. The the average money-market yield over the past year, according to Lipper, has been less than one-tenth of one percentage point. In contrast, the exchange-traded fund based on the Barclays Capital Aggregate Bond Index returned 8% over the past twelve months. The total return of the S&P was 37%.
So when did bonds reach their high-water mark in the AAII survey? Last summer, when fixed-income investments amounted to 25% of portfolios.
Hmm. And what do allocations look like right now? As far as bonds go, there’s little change.
Notice, Sonders said last week, that the current allocation to fixed-income, at 24%, is still very near the category peak hit last summer. “I think this has implications,” she said.
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Moreover, said Sonders, following the previous two times in recent financial history when bonds outperformed stocks over a two-decade period, the next five years “hugely” favored stocks over bonds.
Will the AAII continue its predictive streak as a contrarian indicator? We’ll find out in a few years.
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