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  • Writer's pictureRobert Baharian

Keeping Up With The Joneses

It's a classic conversation over dinner, drinks, and the barbeque - where you're investing your money. You hear about all the winners, the success stories, the secret tips that went wild, and how your mates mate tripled his money overnight.

Yet you never hear about the losses. How far behind are they on their original investment? It's like wandering around the blackjack tables in the casino and seeing that guy with a huge stack of chips piled up in front of him. On face value it seems as though he's a great player. Why wouldn't he be, he's won so much money. I mean, just look at his stack. How long has he been playing? Is he even ahead on his original bets? How much of the stack is his own cash, and how much is the casinos? These are the untold stories folks.

With FOMO back in full swing, here's how investors are allocating their capital according to the American Association of Individual Investors (AAII).

Allocation to stocks is working it's way toward it's highs of 2017. Although investors' allocation to Stocks is yet to surpass it's highs of the late 90s, allocations have certainly surpassed those during the GFC.

Interestingly, allocation to Cash and Bonds have remained quite consistent since the recovery of the GFC, hovering around 15% each.

Furthermore, what's even more interesting is how perfectly investors time the market in precisely the wrong direction. Investor Cash allocations peaked when Stocks bottomed out in both 2003 and 2009. What's interesting here also is when investors' allocation to Cash increase to 25%+, it appears as though investor pessimism is at its extreme, and we all know what happens to Stocks following extreme pessimism (hint - they go up). If you were a true contrarian, you would have moved from Cash to Stocks, and would have made an absolute killing.

Investors are broadly investing in a 70/30 mix, that is, 70% in Stocks (risky assets), and 30% in Cash and Bonds (defensive assets). Investor allocations to Stocks have only surpassed these levels on 2 occasions in the last 34 years (1997 and 2017). And under both of those occasions stocks corrected subsequently. Warren Buffet once said, "Be fearful when others are greedy, and greedy when others are fearful." Unfortunately for most investors however, the market can remain irrational for longer than they can remain solvent.

Investing isn't easy.


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