over 1 year ago • 2 mins
Despite the recent slip in stocks, wealthy investors appear to be bought in at near-record levels. And while it may seem counterintuitive, that suggests the market is set to underperform. The dark blue line, above, shows that affluent investors from the Bank of America’s massive wealth unit – the Global Wealth and Investment Management (GWIM) – are still holding 63% of their total assets under management (AUM) in stocks. That’s only slightly lower than their record high of 66% reached a few months ago, and still well above their average of 55% (light blue line).
There are probably a couple of key reasons for that. First, there aren’t many other alternatives if investors want to generate decent risk-adjusted returns. Bonds still aren’t yielding enough to be considered a serious alternative to stocks, and assets that are generating bigger gains – like real estate or private equity – look too risky. Second, investors might be confident that companies are well prepared to navigate this challenging macroeconomic environment, or that the difficult backdrop of slower growth and high inflation is temporary.
But here’s where I have to rain on this parade: when investors on aggregate allocate too much of their capital to stocks, the market subsequently underperforms over the next 10 years (we’ve covered exactly why here). And sure, the investors represented in the chart above aren’t the whole market. But with $2.5 trillion under management, GWIM’s clients offer a meaningful snapshot of what investors are doing. And that snapshot suggests stocks are poised to deliver lower-than-usual returns over the next 10 years.
So while you might not want to avoid stocks altogether, you might want to set your expectations accordingly. Alternatively, wait for the allocation to stocks to come down significantly before buying, which can happen when we see the market really capitulate.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.