So, what’s behind the longer-term trend toward more equity ownership as well as the static stock holding levels during the aughts?
- Strategic asset allocation frameworks, which form the core of modern wealth management, generally call for at least some exposure to stocks, except in the most conservative portfolios.
Market Realist – The graph above shows the results from a survey conducted by Gallup in July 2014. The responses show that 63% of investors seek advice while creating a financial plan. Out of the 63%, 74% of the investors seek professional advice while creating a financial plan.
Most professional advice is focused on strategic asset allocation. It advises exposure to U.S. equities (SPY) and bonds (BND). Strategic asset allocation refers to a portfolio strategy that involves setting target allocations for various asset classes. The allocations are based on the investor’s financial goals and risk appetite. The portfolio is periodically rebalanced to the original target allocations.
Market Realist – Historically, stocks have a higher probability of outperforming cash and bonds—according to Jeremey Siegel, a professor at Wharton. In his book, “Stocks for the Long Run,” he observed that stocks (IVV) historically outperformed bonds 65% of the time in shorter time periods of one to three years. For a 30-year period, stocks outperform cash, bonds, and Treasuries (IEF) (TLT) about 99% of the time. This can be seen in the graph above.
Continue reading the next part of the series to understand how low yields are forcing investors to take to equities.