Investors detail how allocations would change if stocks slip

October 06, 2017

Keywords: Asset Allocation

Asset allocation is largely determined by long-term goals, but with all things being equal, a substantial portion of investors believe they'd likely shift their allocations to stocks if prices diminish, a newly released survey showed.

Around half of respondents in a recent American Association of Individuals Investors poll said their apportionment of assets would trend toward stocks if purchase prices lowered, something that they haven't done much of for almost the entirety of 2017. The Dow Jones Industrial Average has shattered numerous all-time highs through the year's first nine months, 63 of them tracing back to November, according to CNN Money. On Oct. 5, the index hit yet another trading peak, opening on Oct. 6 at 22,669.08.

36 percent content with current allocation of funds
But softening stock prices wouldn't affect everyone the same way. In fact, 36 percent of respondents in the AAII poll said they felt comfortable with their allocations where they presently stand, and price weakening wouldn't lead to a change. For others, though, the difference would have to be rather significant.

"Valuations are getting 'frothy,'" said one of the AAII's poll participants. "A 10 percent to 15 percent correction would grab my interest again."

Fourteen percent indicated they were basing their asset allocation decisions on what's happening on Capitol Hill, specifically as it relates to tax reform. The White House has proposed an overhaul to the current tax code. If approved by both houses of Congress and subsequently signed into law as the plan currently stands, tax brackets would go from seven to three and the corporate tax rate would be cut to 20 percent, among other notable changes. The global corporate tax rate average is 22.5 percent.

For 8 percent of AAII's respondents, asset allocation changes would come only if short-term interest rates rise again. The Federal Reserve has two more Federal Open Market Committee meetings left in 2017 and a majority of economists, in a recent Wall Street Journal survey, said they expect a quarter-percent increase to be implemented in December.

54 months in a row above historical average
Meanwhile, equity allocations have rebounded as of late. In September specifically, they were nearly 9 percent above the historical average of 60.5 percent (68.8 percent), according to the AAII survey. That's the 54th straight month in which allocations have been higher than the long-term average.

However, both bond and cash allocations were below the historical norm, dropping to 15.1 percent and 16.1 percent, respectively. The average for cash allocations is 23.5 percent, making September the 70th consecutive month that they've been lower.

As for investors' overall distribution of assets, 38.5 percent were in stock funds in September, according to the AAII survey. Slightly behind was stocks at 30.2 percent, followed by cash, bond funds and bonds.

Here at Miles Capital, as an institutional asset manager, allocation is our forte. Our professionals manage approximately $5 billion in equity, alternative investments and fixed income, delivering the earnings solutions that our clients have come to expect.


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