Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for September 2022 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for September 2022 (Final)
1st ETF 2nd ETF 3rd ETF

Where the Crowd Is

| | Posted in: Strategic Allocation

What is the aggregate posture of all investors or, said differently, the asset class allocation of the average investor? In their November 2012 paper entitled “Strategic Asset Allocation: The Global Multi-Asset Market Portfolio 1959-2011”, Ronald Doeswijk, Trevin Lam and Laurens Swinkels estimate the crowd-sourced relative market valuations of investments in ten asset classes: equities, private equity, listed and unlisted (commercial) real estate, high-yield bonds, emerging market debt, non-government bonds (mostly corporate bonds and mortgage-backed securities), government bonds, inflation-linked bonds, commodities and hedge funds since the beginning of 1990. They also estimate the relative valuations of four core asset classes (equities, commercial real estate, non-government bonds and government bonds) since the beginning of 1959. Using annual market valuation estimates from a variety of sources during 1990 through 2011 across all ten asset classes, and during 1959 through 2011 for the core subset, they find that:

  • At the end of 2011:
    • Market capitalization of global investments in the ten asset classes is $83.5 trillion.
    • Equities, government bonds and non-government bonds comprise 34.7%, 30.0% and 18.4% of this total, respectively.
    • Other asset classes are relatively small, ranging from 0.5% for commodities to 4.4% for commercial real estate.
  • During 1990 through 2011, the share of total market valuation across the ten asset classes for:
    • Equities declines from 51.4% to 34.7%.
    • Non-government bonds rises from 11.4% 18.4%.
    • Relatively small asset classes (outside of equities, government bonds and non-government bonds) rises 6.6% to 16.9%.
  • During 1959 through 2011, the share of total market valuation across the four core asset classes for:
    • Equities declines from 51.2% to 37.1% (with 2011 a record low, and maximums occurring in 1968 and 1999).
    • Government bonds rises from 29.6% to 37.1%, close to the 1982 peak of 37.3% and well above average.
    • Non-government bonds rises from 17.8% to 21.2%, well above average.
    • Commercial real estate rises from 1.4% to 4.7%, well above average.

The following chart, taken from the paper, tracks the global aggregate investment allocations to ten asset classes during 1990 through 2011. “Credits” means non-government bonds, and “EMD” is emerging markets debt. Results suggest displacement of equities by non-government bonds and minor asset classes over this recent subperiod.

In summary, evidence indicates that investment allocations to equities are now low relative to other asset classes based on 21-year and 62-year histories.

The authors suggest that deviations from long-term averages might serve as valuation indicators for tactical asset allocation.

Cautions regarding findings include:

  • As noted in the study, the real estate asset class consists of commercial properties only. Many individual investors have substantial investments in residential real estate.
  • Some of the ten asset classes are inaccessible for many investors.
Login
Daily Email Updates
Filter Research
  • Research Categories (select one or more)