Investors Warming Up To Equities Late As Usual

An interesting article this morning via Investment News caught my attention:

“After watching the stock market climb from peak to peak last year, investors are finally starting to warm up to equities.

More than 85% of investors are feeling optimistic about the investment landscape, and 74% think stocks have the greatest potential of any major asset class, according to a survey of 500 affluent investors released Monday by Legg Mason Global Asset Management. The survey was conducted in December and January.

The survey also shows that investors still hold relatively conservative portfolios, but are increasingly willing to increase exposure to international assets.”

This is not a surprising survey by any measure. In fact, it is typical of what you would expect from a group of individuals whose investment decisions are primarily driven emotional behavior rather than a disciplined investment process. 

“At the time this survey was conducted, investors had experienced in the U.S. a pretty positive stock market,” said Matthew Schiffman, managing director and head of global marketing at Legg Mason Global Asset Management.“Markets are typically forward looking, while investors are typically backward looking.”

Investors are indeed backward looking as shown below. The Investment Company Institute (ICI) began tracking flows into equity funds in 2007 which I have overlaid with the investor psychology cycle. In this manner, you can witness investor behavior in “real time.”

However, the idea that individual investors are still “out of the market” should be taken with a bit of caution. The chart below is data compiled by the American Association of Individual Investors (AAII) which surveys it membership on portfolio allocation.  The data is compiled and released monthly.

With cash hovering at the lowest levels since the “Tech Wreck,” and equity exposure at the highest, investors are more than just “warming up” to equities. They are effectively“all in” with respect to the financial markets. An analysis of investor sentiment (both professional and individual) and rising leverage confirm the same.