By Mike Dolan
Dedicated to Stocks
LONDON, Feb 23 (Reuters) – In a financial climate riddled with record peaks, expensive valuations, restricted markets, and raving tech trends, one might expect U.S. household savers to start hedging their bets and diversifying away from equities. However, this is far from reality.
In an unusual, long-term momentum move, American households with substantial savings find themselves deeply linked with stocks more than ever before.
An Unlikely Love Affair
JPMorgan’s long-term strategists Jan Loeys and Alexander Wise have dissected the American “love affair” with equity. They illustrate how the share of stocks held by households and non-profit funds has skyrocketed over 40 years to hit record levels of over 40%.
While this may seem like a modest chunk of total savings, it has escalated steadily since hitting a low point of around 10% in the 1980s, surpassing equivalent equity holdings in other major countries. This disparity contradicts the expectations for an aging population to adopt a more risk-averse investment approach as they approach retirement.
Anatomy of Inertia
Despite attempts to fathom this behavior, a key reason boils down to inertia, contentment, and a significant dose of optimism about the future.
According to data from the Federal Reserve’s U.S. financial accounts report, the 40-year surge in the equity share of household savings might be the result of stocks’ passive outperformance over that period.
Going with the Flow
Unlike professional fund managers, who tend to rebalance their portfolios by selling when an asset class outperforms, households often stay put, hoping for the best.
Over the past four decades, this strategy, odd as it may seem, has been quite successful.
Unwavering Confidence
The unwavering confidence in stocks is not solely due to indifference; rather, it’s an extrapolation of past performance coupled with trust in its continuity. This confidence, in turn, has perpetuated at least half the outperformance of U.S. equity versus the rest of the world.
What Lies Ahead
There are factors such as low economic volatility and interest rates that have encouraged more risk-taking over these decades. The rise of cost-effective passive investment vehicles and direct equity-buying tools has also lured many into the equity space.
Looking forward, as macro volatility increases over the next decade and yields rise, there may be changes in behavior. However, a significant shift towards lower equity allocations by U.S. households and non-profits is not imminent as return expectations remain optimistic and households are not known for swift changes in their asset allocations.
Damaging to Your Wealth
Despite the reservations surrounding a narrowly-led, overvalued stock market at record peaks, it’s crucial not to act irrationally.
Cautionary Tale from History
Duncan Lamont, head of strategic research at Schroders, delved into 100 years of market returns. He found that cashing out of stocks at record highs would have been extremely costly over time.
The average inflation-adjusted stock returns in the 12 months after reaching new records surpass those from any other month. Similarly, the long-term growth potential of stocks is undeniable.
So, Should You Sell?
“It is normal to feel nervous about investing when the stock market is at an all-time high, but history suggests that giving in to that feeling would have been very damaging for your wealth,” Lamont concluded. “There may be valid reasons for you to dislike stocks, but the market being at an all-time high should not be one of them.”
The views and opinions expressed herein are those of the author, a columnist for Reuters.
