Sometimes you come across a chart or graph that takes an abstract idea and makes it very tangible or real. The chart below from U.S. banking giant JP Morgan strikes me as one of those pithy but powerful statements, speaking to the level of emotion that’s driven investor behaviour over the past year and which is still a big factor today.
We are accustomed to thinking of asset allocation in the context of individual portfolios, but the snapshot below looks at investor’s current allocation to stocks, bonds and cash on a global basis and compares today’s situation with historic norms.
The chart shows that the world’s allocation to equity investments is at the lowest level in 20 years, with fixed income picking up the bulk of the weighting and cash also representing a significantly higher weighting relative to equities. In short, investors the world over are underweight equities relative to the long-term historic average and significantly so.
Clearly, the chart above shows that over the past year, many investors around the world have gravitated towards “safer” asset classes, namely cash and fixed income. But, over time, this is likely not an effective investment strategy. By contrast, professional money managers use asset allocation models built on fundamental investment theory and research to achieve their investment objectives. These tools take emotion out of the equation.
It is important to note that no asset strategy will be ideal during all market conditions, it is the managemetn of emotions and the use of rationale thought and research that will help you understand the market.
Many investors say they recognize that they can’t participate in a market recovery if they’re sitting on the sidelines yet the chart above suggests that for most, their fears get in the way of making disciplined, rational decisions. Most people need some exposure to equities in order to achieve their long-term financial goals.