February AAII Asset Allocation Survey: Bond And Bond Fund Allocations At A 17-Month High

Includes: DIA, QQQ, SPY
by: AAII

Allocations to bonds and bond funds rose to their highest level since September 2010 in the February 2012 AAII Asset Allocation Survey.

AAII members allocated 59.1% of their portfolios to stocks and stocks funds in February. Though down 1.8 percentage points from January, this is still the second-highest allocation to equities in the past seven months. The historical average is 60%.

Bond and bond funds allocations accounted for 22.6% of individual investors' portfolios last month, an increase of 1.7 percentage points. As noted above, this is a 17-month high for fixed-income allocations. It is also the 33rd month that fixed-income allocations have been above their historical average of 15%.

Cash allocations were essentially unchanged, rising just 0.1 percentage points to 18.3%. February was the third consecutive month that cash allocations remained below their historical average of 25%.

Fixed-income allocations rose as individual investors became less fearful of a rise in interest rates over the foreseeable future, in large part due to the Federal Open Market Committee's intention to leave interest rates unchanged until at least 2014. The decline in equity allocations shows that optimism among individual investors about the short-term outlook for stocks is being tempered by ongoing concerns about Europe's sovereign debt problems, slow U.S. economic growth and the Federal deficit.

This month's special question asked AAII members how the Fed's decision to leave interest rates unchanged until 2014 has affected their portfolio allocations. Responses were mixed with many respondents saying the decision did not impact their portfolio allocations. A large number of respondents said they were increasing their allocations to stocks, particularly dividend-paying stocks. Others said they were increasing their allocations to bonds and bond funds.

An underlying theme was higher risk. Many AAII members said they are shifting to riskier investments, including stocks and higher yielding bonds, in an attempt to increase their portfolio income.

Here is a sampling of the responses

  • "I am less likely to reduce my bond holdings for a time."
  • "I have taken on more risk in retirement than I had originally planned."
  • "More bonds--government agency debt and corporate--and less CDs. In effect, I'm taking on more risk in the fixed-income portion of my portfolio."
  • "The Fed's policy is inconsequential since I'm maintaining a 60%/40% stock/bond allocation."
  • "It lessens my haste in moving money invested in dividend-paying stocks to bonds and cash."
  • "No change, but I'm prepared to act if there is a change in interest rates."
  • "It has made me more disgusted with our central bankers!"

February Asset Allocation Survey Results:

  • Stocks/Stock Funds: 59.1%, down 1.8 percentage points
  • Bonds/Bond Funds: 22.6%, up 1.7 percentage points
  • Cash: 18.3%, up 0.1 percentage points

February Asset Allocation Survey Details:

  • Stock Funds: 28.6%, down 2.7 percentage points
  • Stocks: 30.5%, up 0.9 percentage points
  • Bond Funds: 17.0%, up 1.0 percentage points
  • Bonds: 5.6%, up 0.7 percentage points

Historical Averages:

  • Stocks Total: 60%
  • Bonds Total: 15%
  • Cash: 25%

The AAII Asset Allocation Survey has been conducted monthly since November 1987 and asks AAII members what percentage of their portfolios are allocated to stocks, stock funds, bonds, bond funds and cash. The survey and its results are available online at: http://www.aaii.com/investor-surveys.

Charles Rotblut. CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.