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Mondial Chart of the Week: Equity allocation ascending to near its peak ๐Ÿ“ˆ

30 May 2021


What this chart shows?

This chart shows portfolio allocation of individual investors in the US from 1990 to March 2021. The current average allocation to equities is around 70%, after having performed strongly over the last 12 months. Since 2009, allocation to equities has increased whilst the allocation to cash and bonds has decreased. Over the last 30 years of data, the average equity allocation has been 61%, with the peak registering at 77%, at the height of the tech bubble in 2000. The lowest allocation to equity registered was after the Great Financial Crisis at only 41%.

Why this chart is relevant?

One potential reason for the lower allocation to bonds over the past ten years may be due to their decreasing yields and consequently lower expected returns. At the same time, the bull cycle has meant that equities have generally performed strongly, giving investors reason to increase their allocation to the asset class.

However, investors can only allocate a finite amount of their portfolio to equities, and as the current average allocation is approaching its historical peak, investors could at some point stop buying equities, affecting flows and therefore market returns (though only to a marginal extent). Similarly, a disappointment in growth, a hiccup in earnings or simply a price correction could trigger substantial outflows that in turn would also put pressure on stock prices. This indicates that as the average allocation to equities increases, the risk for positioning reversals increases too.

Source: American Association of Individual Investors, Momentum Global Investment Management

Research Date: May 2021

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