Most stock market investors are like whiny little kids.
When the market is down, they declare that growth is a thing of the past and civilization is heading toward destruction. When the market hits new all-time highs (as it has recently), they complain that stocks are overvalued and bubble predictions start flying.
One of the most common theories professional investors enjoy pointing to is the negative signal of individual investors rushing into the market, or "dumb money." Not surprisingly, even as everyone proclaims the ignorance of the dumb money, no one actually admits to being dumb money. Considering that most hedge funds and mutual funds underperform a low-cost S&P 500 index fund, individuals who simply manage their temperament and hold on through thick and thin probably deserve the title of "smart money."
Simple sample
JPMorgan Chase's (JPM 0.15%) Asset Management division currently has just under $1.5 trillion under management. But this isn't entirely traditionally "smart" money. Fifty percent of assets are classified as "institutional," but 26% are "retail" and 22% are funds from "private banking" clients. While the assets certainly lean toward institutional money, most investing groups are appropriately accounted for in this sampling.
As stock indices have reached new heights, predictions of a pullback have also reached new levels. But is it justified? Is there no more money left to fuel stock gains? In the first quarter of 2013, JPMorgan's asset management group reported that only 34% of assets under management were allocated to equities, up from 31% in the fourth quarter.
Although market gains affect allocation percentages, if we look back to 2005 and 2006, the average amount allocated to equities was 43%. While I'm not suggesting that the allocation percentages of those days were optimal, a 9% difference on an asset base of $1.5 trillion equals approximately $135 billion of potential buying pressure, most likely both institutional and retail money. And that's just from JPMorgan clients.
Who's hungry for risk?
Should 2005 and 2006, years of potentially excessive and greedy equity buy-in, be used for comparison? Maybe. But maybe not. The constantly changing investing landscape makes most short-term comparisons virtually useless. This change in allocation preference merely suggests that there has been a shift in risk appetite that may or may not change.
However, there is one time-series of data that isn't consistently argued against: the overall performance of the stock market since its modernization, which includes more than 100 years of data. Despite the crashes and rallies, on average, the total return of the stock market has been around 9% per year. So, regardless of how you justify being invested in the market to yourself, it's always the safest move to stay invested and turn down the noise. Take heed from one of the savviest investors of all time, Warren Buffett:
Since the basic game is so favorable, Charlie [Munger] and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts," or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.
