Very many years ago I published an obscure article in ‘Benefits Canada’ that demonstrated (using data on institutional fund managers) asset allocation by professionals is not much different from behaviour by retail investors. The dollars allocated to an asset class peak just when that asset is about to deliver crappy returns, and the commitment to an asset class is at its lowest levels (bottom of the policy range) just before the returns are about to rocket. A consultant friend of mine even asked permission to use the results for a speech she was making at a conference for pension plan sponsors. We all (I think) are aware of the pattern: For example I came across the below news item today
“LONDON, Sept 29 (Reuters) – Investors are entering the fourth quarter with a slightly raised exposure to shares and holding high reserves of cash that could quickly be used to fuel a stock rally, Reuters polls showed on Thursday.
Surveys of 59 leading investment houses in the United States, mainland Europe, Britain and Japan showed an average of 50.5 percent of a balanced portfolio was held in equities in September, up from 49.2 percent in August.
The shift was mainly the result of a move away from bonds — down to 34.6 percent from 36.1 percent. But investors also showed their concern about the state of global finance by pumping money into safe-haven cash.
Cash allocations were at 6.3 percent, the highest since the polls were first conducted in their current form at the start of 2009. High levels of cash have in the past been counter-indicators, a precursor to a stock rally.”
A picture (with added arrow for effect) is worth many words. You note that in the one below the last ‘bottom’ (summer of 2010 when I wrote A Maverick Investor’s Guidebook that equities had indeed grown underweighted by pro investors just prior to a substantial rally.
Here we go again. Despite knowing this happens again and again, it’s fascinating to me that behaviour never gets modified. My daughter recently brought home a kitten – the silly cat will jump on the keyboard while I’m typing and naturally I’ll smack her off. Demonstrating a serious lack of learning capability (some cats, like many people, are just plain crazy) she’ll jump right back up onto the keyboard again…and again.
From the same article:
Nonetheless, there are few signs at the moment that the issues that have been limiting risk investment — the slowing global economy and the euro zone debt crisis — are going away.
For that reason, cash remains so popular.
It is best to remain cautious for the time being with higher than usual exposure to core developed market government bonds and cash,” said Neil Michael, executive director of investment strategies at London & Capital.”
Funny thing is, why is it “best” to remain cautious? If there really were ‘signs at the moment that the issues that have been limiting risk investment…are going away’ we would certainly have already missed the lion’s share of the upside. It’s a bit of a conundrum if you ask me.
I was reading a morning commentary from an institutional salesman, after the market bounced back (as I predicted – see prior posting) from the Bernanke Twist. A client had teased him that his firm was on the sidelines right at the market bottom. Truth is, even those giving advice know it’s useless to try to call a bottom….if you’re right the client (who really is on the sidelines) will either forget you’re call anyway or worse…resent you for getting it right and not ‘forcing’ him to do something about it. If you’re wrong, it will be a very long time indeed before the client forgets that you were wrong and he was right. And if he acted on your advice and you were wrong, then you might as well remove him from your speed dial.
If you have the gonads, and it’s your own money then be like George Costanza and “Do the Opposite.”