Is Cash Trash?
What did the number 0 say to the number 8? Nice belt. Ha! Lock down life and kids jokes. But it did get me thinking. With cash rates at near zero, bond yields at record lows, investors continue to be pushed into directions they may not have gone before. It also creates bubbles in all sorts of places - unintended consequences.
I've put together the latest asset allocation of investors from the American Association of Individual Investors (AAII). Allocation to stocks are at levels not seen since the late 90's/early 2000's. In fact, it's the 25th highest reading on record. The last time we saw allocations this high, we saw the end of an uninterrupted bull run and the arrival of much higher volatility. And allocations to cash have fallen to the 5th lowest reading on record.
It's expected. No? Sure it is. But we've also seen the emergence of a new investor class. An investor class that is taking as much, if not more interest in stocks than their parents and grand parents. They have a much longer time horizon, they can ride the ups and downs, they have access to information, and they have access to products, all for the cost of peanuts.
In fact, this cohort is paying more and more each and every time they buy stocks. And the more you pay for an investment, your expected return falls. It's simple. Tell me this cohort doesn't want a crash. Tell me this cohort doesn't want to pay lower prices for stocks?
Next time we see a rise in volatility, as this bull market ages, next time we see a collapse in markets, there is a new cohort of investors that will see this as a buying opportunity. For those investors who do not have the time horizon of this cohort, how your portfolio is designed and allocated is imperative.