Seeking Alpha

Investor behavior: Same as it ever was

  • The financial crisis changed nothing, writes Vanguard's Fran Kinniry: Investors continue to chase returns, and have lately been jettisoning fixed income for stocks. Driven by the 4th greatest bull market on record - a cumulative return of 198% since the bottom - global equity allocation for investors has increased to 57% from 38%, and vs. the 20-year median of 51%.
  • It's probably time for the typical investor (one with an equity-heavy portfolio) to maintain a prudent allocation by directing new cash flows into bonds, while selling stocks - the exact opposite of where money is flowing today.
  • "Rebalancing usually seems counterintuitive at the time when it promises to be most effective," says Finniry. "It can be difficult to implement from a behavioral standpoint and requires incredible discipline." With equities partying and the near-universal belief of higher interest rates on the way, who could blame an investor for not wanting to sell stocks and buy bonds.
  • "It is very common following significant gains in the equity markets for investors to question the benefits of rebalancing," but it's never "different this time;" instead it's the "same as it ever was."
Comments (35)
  • Interest rates haven't fully risen yet. Rates are still historically low for picking up more long term bonds. (It's better to own straight bonds to maturity than a bond fund, to get "bond-benefits" in a portfolio.)


    Doesn't Kinniry have a vested interest in getting investors into bonds?


    Are we close enough to the bottom on bond funds, to go in before they go up? With rates still to rise, it's not the bottom yet.
    23 Nov 2013, 09:24 AM Reply Like
  • I'm a big fan of muti-sector bond funds (like Putnam's Diversified Income fund (PDINX) or Pimco's Income fund (PONDX), because those funds seek bond diversification across type, quality\yield and maturity. This tends to mean less volatility when interest rates rise (but correspondingly smaller gains when interest rates decline), while offering a nice rate of return. Such funds allow me not to have to be an 'expert' in bond picking to avoid losing my shirt.
    25 Nov 2013, 05:23 AM Reply Like
  • The point I agree with is that the current bull market is getting long in the tooth. Given that it followed a huge decline and has now run up, how much steam is there? We're approaching a 5 year bull run come March '14 with many investors sitting on huge returns. Right now greed is ruling the investment world, and it seems like you could throw a dart at a board with random DOW stocks and have a good chance to start making money quickly.


    Trimming your positions and missing the top is less detrimental than holding through a plunge. The way stocks free fall when negativity permeates the business world is not so easily avoided because you want to convince yourself that stocks can only go in the direction that favors you.
    23 Nov 2013, 09:41 AM Reply Like
  • Market is still not at the top and not overvalued
    S&P will see 2000 within 12 months
    I now predict 2050 as the high in this current bull
    I will sell into that rise to that point
    My new money is going to REITS, Foreign stocks and Financials
    I also start to buy TIPS in here - I know there is no inflation.
    Cash is also an asset
    The Vanguard fellow does not mention that


    23 Nov 2013, 09:47 AM Reply Like
  • I agree with you, but why buy REITS?
    23 Nov 2013, 11:01 AM Reply Like
  • recent relative underperformance and inflation protection
    if things heat up next year then REITS will do well
    if not then it doesn't really matter.
    REITS are ok in a rising rate environment if inflation is rising.
    23 Nov 2013, 10:37 PM Reply Like
  • Hi Petrarch , this my seems as a newbie question, I was under impression if rates raises it will increase the financing for REITs. Could you please elaborate more on your point.? Thanks Pedro
    24 Nov 2013, 09:25 PM Reply Like
  • As usual the little guy will get in at the top and get slaughtered.
    Better to miss some upside than to lose big on the downside.
    This probably doesn't apply to SA readers because by the fact that they are here they are better investors/traders than the average guy on the street.


    Having said that, getting into bonds now? I think not.
    23 Nov 2013, 09:54 AM Reply Like
  • GDP is highest ever, with highest productivity. Why shouldn't US stock market be highest ever? Couple that with less companies and less shares (all the buy backs). Add to that very low competing returns. Plus increased sales on the way as all the fed cash makes its way into circulation. Stocks are going 20-30% higher in the next 12-18 months
    23 Nov 2013, 10:27 AM Reply Like
  • Phillips
    Two thoughts to ponder.
    The market is up because the PE is expanding; not because the E is going higher at some high rate.
    Sales are not increasing; any increase in E is mostly due to cost cutting. Those 50 million people on food stamps really don't have any discretionary money to spend.


    Having said this; don't fight the Fed but be very very cautious.
    23 Nov 2013, 11:06 AM Reply Like
  • When bond guys are out there telling you to buy bonds you know you are on the eve of the greatest rotation from bonds to stock in history.
    23 Nov 2013, 10:37 AM Reply Like
  • For me rebalancing is made much easier when I ask myself what would have the greatest impact on my financial health- a 20% increase or a 20% decrease. My lifestyle would be effected by the drop.
    23 Nov 2013, 10:37 AM Reply Like
  • The red herring argument of the perma bears "the market has reached an all time high! The world is ending!"


    Meanwhile, world population is reaching an all time high, food production and consumption are reaching all time highs, commodity consumption is at all time highs this decade, world middle class population is reaching all time highs, which means nearly every consumer market is bigger now than it has ever been.


    Of course, you can "never be wrong" playing the role of a permabear. Every 7 years or so, you get to be right once.
    23 Nov 2013, 10:42 AM Reply Like
  • Dantes_Will:
    You are so right on the permabears but one shouldn't forget when their times comes they are back on CNBC telling everyone how clever they are. New book titles will shout " I told you so "-"buy me I can save you."
    23 Nov 2013, 11:09 AM Reply Like
  • It's ironic that the permabear label applies to stocks when the stock market is small by comparison to the bond market. The recent two year surge in stocks seems to be creating a bit of euphoria, as it seems that many people forget that as recently as October 2011, long term government bonds outperformed the broader stock market for the prior 30-year period with far less risk.


    All that is needed now is for Europeans to start piling into US stocks and it won't be long before the obesity-challenged lady sings.
    23 Nov 2013, 12:48 PM Reply Like
  • WSD:


    Europe just now starting to show recovery signs, so European investors will all flee for U.S. stocks?


    If one wishes to recall what "euphoria" looks like, think back to the late '90's or mid-'00's. In both those circumstances people were all going to "get rich" either day trading Internet stocks or flipping houses, and they put their money where their mouths were. Not a discouraging or cautious word was to be found. Now, most retail investors can barely, timidly muster enthusiasm to be invested in any type of issue.
    24 Nov 2013, 10:26 AM Reply Like
  • Tack: As I recall, Europeans were last to the US stock party in 1999/2000. European currencies declined dramatically in 1995-2001 relative to the dollar. The US equity markets rose massively from 1995-2000, as you likely remember. The combo made US equities have massive outperformance for European investors during the run-up in 1995-2000 Unfortunately, the vast majority of European investors came late to the party, and subsequently suffered the US stock market crash while their own currencies bottomed (in 2000) and started a prolonged climb, magnifying their investment losses.


    As usual, people like to chase performance.


    It's true that nothing compares with '99, & probably won't again for decades--not to that degree anyway. Anything is possible, but I don't think the masters of the universe at the Fed would sit by and watch a widespread repeat of '99.
    24 Nov 2013, 11:27 PM Reply Like
  • I hear you Mikeg999


    I think much the daily diatribe from bulls vs bears is to some extent....often directly proportional to those who's major concern is conserving what they have vs those needing to get to that point.


    Give me a vehicle that will guarantee 5% interest and no loss of principal and I'd be happy as a lark.
    23 Nov 2013, 11:04 AM Reply Like
  • I too would like a program that provides a low risk (close to Treasury) return 1.5-2.0 above the inflation rate.
    23 Nov 2013, 11:26 AM Reply Like
  • Me too. Where is that at this point?
    24 Nov 2013, 05:24 AM Reply Like
  • "Don't fight the Fed" has proven to be true.
    23 Nov 2013, 11:13 AM Reply Like
  • The inordinate focus on Fed Policy is misguided... look to signs in the business cycle...the party hasn't even started for the economy,,,but it will...
    23 Nov 2013, 11:51 AM Reply Like
  • bbro
    IMO $85 billion a month ain't chump change and has driven the entire bull market and the economy is going down from here, or at best stagnant, not up.
    Just my opinions.
    Meanwhile enjoy Ben's Kool Aid party.
    23 Nov 2013, 12:20 PM Reply Like
  • The inordinate focus on Fed Policy is misguided... look to signs in the business cycle...the party hasn't even started for the economy,,,but it will.
    23 Nov 2013, 11:51 AM Reply Like
  • why not also list the best 3 bull markets?
    23 Nov 2013, 11:58 AM Reply Like
  • The Vanguard article is misleading.


    1. There is *always* a seller for every buyer. Who are retail investors buying from? Answer: other sellers. (The overwhelming majority of shares being traded are not IPOs.) Does the author have evidence that retail buyers of stocks are buying from professionals who are selling?


    2. The article doesn't explain how much of the change in allocation to bonds & stocks is a result of the increase/decrease in the price of bonds/stocks. An increase in the price of stocks accompanied by a decrease in the price of bonds elevates allocation percentages of stock, even if "fund flows" are static.
    23 Nov 2013, 12:23 PM Reply Like
  • The market is at all time highs because corporate profits are at an all time high. It's that simple. PE ratios are something the talking heads use to get the public focused on something easy to understand even though they are a lagging and somewhat useless indicator. It's all part of the bait used to reel the suckers in. These things take time.


    If one considers the correction that occurred in 2011 as a mini-bear market then the current bull move makes more sense with the stock sectors following typical patterns of market leadership. It would also imply that the current bull market is relatively young and may continue on for some time. At some point, probably after a decent pullback, we should see a rotation into the commodity sectors with the likes of health care and finance, either retreating or more likely, moving sideways. Watch the utility sectors. When they are one of the strongest sectors, we almost certainly into the first leg of a bear market.
    23 Nov 2013, 12:29 PM Reply Like
  • Eagle,
    U have highlighted two very important facts that most fail to see..


    "The market is at all time highs because corporate profits are at an all time high. It's that simple. "


    "If one considers the correction that occurred in 2011 as a mini-bear market then the current bull move makes more sense with the stock sectors following typical patterns of market leadership. "It would also imply that the current bull market is relatively young and may continue on for some time. "


    Your commentary is "spot on " ----- As We are in a secular bull market !
    The second point you make "destroys" the naysayer theory that this bull run ends in March '14. Of course the naysayers said the run would end in '13 , now we have seen how that story has played out ..


    Enuff said .
    23 Nov 2013, 05:50 PM Reply Like
  • You're missing the point. The corrections that occur today are fast, really fast. Being cautious after enjoying huge gains, there's nothing wrong with that.


    Nice name drop BTW. This isn't a question of perma bears or perma bulls, anyone that is "perma" anything is one dimensional and therefore doing his/her portfolio a disservice.


    We don't know when it's going to end, but when it does, it won't be taking the stairs down. What I predict is not when, but since the paper gains have been huge, buyers will be running to the exits to lock in their gains once the music has stopped.
    23 Nov 2013, 07:27 PM Reply Like
  • Fear&Greed:


    Look at the chart in the referenced Vanguard Fran Kirry link. Hopefully you'll thereafter quit spreading the same myth you've been repeating over and over about how "Investors are underinvested in stocks compared to history."


    Note that investors had much LOWER equity allocations earlier in the 20th century.
    23 Nov 2013, 07:28 PM Reply Like
  • Fear & Greed: Thanks for your comment.
    23 Nov 2013, 07:57 PM Reply Like
  • WSD,


    The info I have 'spread" here on SA & elsewhere is factual , with links to the articles provided , The latest being from "blackrock" , if u wish to debunk that , be my guest. Also , it may come as a surprise to you that most can make "their" numbers say anything they desire. so all can take any of these reports for what they are worth.


    I stand by my assertion that the mom & pop,, retail guy are not banging down the doors or calling their money managers to "get in " to this market .. Maybe you will realize that , what is occurring ,in the report u mentioned is simple reallocation by investors which are over allocated in losing bond funds , so where do u think that money will go , its either a mattress or equities. So it is quite different from any "mania" nonsense you wish to spread . Oh, and when I see that change, I will "spread" that fact as well....
    Call any money manager you wish, ask them if they see the retailguy back in droves as you insinuate .. 


    Use whatever metric or report you wish sir, but to date the facts ' Im "spreading" have served me well regarding the equity markets, Please provide the readership with some factual info of your own that may be of assistance .. To date , its simply more rhetoric with no substance..
    Good day ...
    24 Nov 2013, 10:05 AM Reply Like
  • Maybe some investors should rebalance a little, but the bull market will continue to higher highs at some point not too distant, since the yield curve is sharply positive and will remain so for at least a few more years unless the stock market gets way out of hand quickly sothe Fed decides to rein it in with a flat yield curve. Even a major bull market has long pauses and 10-15% corrections. The occasion of an actual taper in QE next year will probably coincide with a temporarily overbought stock market and be blamed for a normal 10-15% correction, but that might merely bring SPY down from 200 to 180 for a while.


    One wonders just how high the market averages can go ultimately after the world economy begins to accelerate a little (that will happen some day!). A recovery has barely begun in Europe. This reminds me somewhat of 1993-94 when the market averages crawled out of a long trading range and kept relentlessly jumping upward for six more years to the great chagrin and disbelief of most investors.
    24 Nov 2013, 12:08 AM Reply Like
  • For me it's about valuation and earnings, past and future. How long it has gone on, how high it has gone, is really only interesting history for study.


    I agree, as the previous poster stated, If Kinniry has a vested interest in his statements it should be posted.


    Everything I've seen is long bonds are way over valued.


    I do however believe in a diversified portfolio, but no bonds for me until rates have done some rising.
    24 Nov 2013, 05:25 AM Reply Like
  • you got to know how to read the charts and more important how to interpet the readings the chart tells everything about the stock , who is buying who is selling where its going next
    24 Nov 2013, 10:06 PM Reply Like
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