Equity Exposure as Percentage of Portfolios

Did the drop in equity exposure happen because investors decreased their equity exposure or was their decreased equity exposure the result of declining equity values? Are individual investors really just investing in buy and hold portfolios, hoping that equities will rebound? How should the declines in equity exposure be allocated between investors reducing their equity holdings and the general bear market that saw large reductions in the value of equity holdings in 2000 and 2008?

click for larger chart

Source: Federal Reserve

Given yesterday’s Bonds beat Stocks discussion, I thought this chart might be worth reviewing. Its from the most recent Federal Reserve Flow of Funds Accounts of the United States (Q1 2012).

My thesis continues to be that the death of equity type attitudes are cyclical; When there is widespread equity exposure (“enthusiasm”) valuations tend to be higher and risk levels elevated.

Here we are, 12 years after the dot com crash, 5 years after the financial crisis, and equity exposure remains higher than any period before 1997 — but appreciably lower than the dot com years; exposure to equities is modestly lower than the housing boom period as well.

Note that 1974 was when ERISA laws created the 401k industry, and that could account for some of the 1974 to 2000 increase.

This metric is not a precise timing tool. The absolute level seems to matter less than sudden drops (1969, 1973, 2003, 2009) do. In that way, this operates like a psychology/sentiment gauge.

via Equity Exposure as Percentage of Portfolios.

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