4 Reasons Investors Are Buying Stocks Now

Mar. 06, 2011 1:49 PM ETDIA, SPY, QQQ8 Comments
John Tobey, CFA profile picture
John Tobey, CFA

This year investors' interest in stocks is charged up. The question being debated is “Why?”

Here are four drivers of investors' stock buying.

1. A desire to resume normal stock buying

Individuals, as a whole, build assets over their working lives, and make withdrawals during retirement.

Because accumulation inflows are larger than distribution outflows, investors buy more than they sell. Historically, stocks represent a large portion of that buying. However, bond buying and even stock selling was the norm from 2008 through 2010.

The best way to view the change in investors' actions is to examine mutual fund flows. Here is the latest picture:

Click to enlarge:

Over the past seven weeks, $49 billion went into long-term funds, of which $23 billion (47%) went into U.S. stock funds and $10 billion (20%) went into international stock funds, for a total of $33 billion (67%).

This 67% is within a "normal" buying range.

2. A need to rebuild stock allocations in portfolios

The difficult times following the stock market's 2007 high caused investors to become reluctant stock investors.

With investors now returning to normal stock buying, they soon will be looking at the need to rebuild their underweighted positions in stocks. How large is the gap?

We can see the hole that needs to be filled by examining the year-end allocations of mutual funds, starting with the more normal periods of 2005 and 2006.

Click to enlarge:

There are three key observations:

  • Long-term assets appear to be back to a normal allocation of about 75%. However, many investors have fled money market funds to higher yielding bond funds. Likely, this means that overall, investors view some of their bond holdings (e.g., short-term) as cash reserves.

  • The 7% shortfall in stocks is enormous. Investors would need to transfer $800

This article was written by

John Tobey, CFA profile picture
I am the founder and editor of Investment Directions. My career has been managing and consulting to multi-billion dollar funds. Using the widely accepted “multi-manager” approach, I have worked with top investment managers throughout the country, gaining a high level of expertise. My career has spanned many market environments, and I have hands-on experience searching out opportunities and avoiding risks in all of them. I now devote my time to Investment Directions, with the goal of helping investors further their understanding and improve their investing skills. I am currently serving on: The AAUW Investment Advisers Committee and The City of Vista Investment Advisory Committee.

Recommended For You

Comments (8)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.