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Are Retail Investors All in on the Stock Market?

Individual investors or retail-type investors have amassed sizeable stock holdings as stock market indexes climb to all-time highs this year. According to recent statistics from the Federate Reserve database, US stockholdings among Americans are at the highest level on record at 41% of their total financial assets as of April 2021.


Some have suggested the proliferation of passive indexed-based funds, ETFs, 401-K plans, 529-plans, IRAs, and retirement stock plans, and price appreciations of stock prices have attributed to the record level stock holdings by US investors.

Meanwhile, the Covid-19 stimulus checks have fueled a record rise in household incomes. The 1-year lockdown and the work from home trend have led to many Americans opening brokerage accounts as they venture into the world of stock investing.


Yet other investors have become increasingly aggressive by using borrowed money to leverage on stocks. According to Financial Industry Regulatory Authority (FINRA), the monthly margin debt balances have exploded to $823 billion, setting another record high.


Although US interest rates have risen from their March 2020 low, they are still trading near historic lows. Investors have also become increasingly comfortable with holding stocks. Signs of retail investors shifting more of their assets out of the bonds and cash into stocks are visible.

For instance, the recent survey by the American Association of Individual Investors showed retail investors are moving more of their asset allocation toward stocks.


As of April 2021, the monthly AAII asset allocation survey shows individual investors at 70.3% in stocks, 15.1% in bonds, and 14.7% in cash. Since November 1987, the average stock allocation is 61.3%. The maximum stock allocation at 77% (January and March 2000) and the minimum at 40.8% (March 2009). The AAII Bonds allocation, currently at 15.1%, has fallen below its average of 16.0%. The maximum bond allocation occurred in May 2010 at 25.5%, and the minimum at 6.9% during November 2000. Cash levels have also plummeted to 14.7% during April 2021, far below the average of 22.7%. The maximum cash level occurred in March 2009 at 44.8% and the minimum at 11.0% during March 1998.


So, are individual investors all in on the stock market?


Remember, sentiment surveys and investment polls are contrarians in nature. They tend to reach extreme levels and stay at these levels for an extended timeframe before reversing the course. Although history does not need to repeat itself, it tends to rhyme. We recommend investors and traders monitor AAII’s prior asset allocation record levels for signs of the elusive stock market top. For stock allocation levels, it is 77%, coinciding with the January and March 2000 highs. For the bond allocation, 6.9% last witnessed during November 2000, and the cash level at 11.0% corresponding to the March 1998 period.



Source: Courtesy of American Association of Individual Investors (AAII)


Source: Courtesy of American Association of Individual Investors (AAII)

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