Bernstein: Excess Risk Aversion Has Made Investors ‘Wallflowers’



Are you a wallflower?

In his November 2016 Insights newsletter, Richard Bernstein stated, “It is incredible that investors have basically been wallflowers during the second longest bull market of the post-war period.”

Expressing his disappointment, Bernstein said that a repeat of the events of 2008 has led investors to other asset classes without their recognizing the risks therein.

In his earlier newsletters, Bernstein says that the current bull market has legs in the form of the fundamentals driving stock prices (IVW) (IWF). He explains that a bull run constitutes accommodative monetary conditions provided by a central bank, an improvement in fundamentals, and negative sentiments. All these elements are present in the current bull run, making it a typical bull market.

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Bernstein’s optimism regarding this bull run hasn’t waned. Ever since Richard Bernstein Advisors was formed in 2009, he’s held that the US equity market (FVD) (VYM) may be entering one of the biggest bull runs of its career. The company continues to believe that the bull market will create a new record by the time it’s over.

Misallocation of capital

The affinity toward bonds in this equity market (SPY) bull run continues to surprise Bernstein. He calls the fund flows reflected in the graph above a “misallocation of investment capital.”

According to Bernstein, “Pensions remain underfunded, hedge fund performance has suffered, and individuals are worried about saving for retirement as the opportunity cost of not investing in equities grows.” He believes that appropriate asset allocation would be useful in treating these issues.

Bernstein concluded his November newsletter by saying that though it’s prudent to remain cautious when investing in a comparatively risky asset class such as equities, the decision cannot be solely based on the risk perceived in that asset class. It must be made in light of the opportunity cost and potential returns associated with the asset class they’re giving up on. According to him, investors “are paying too much for downside protection.”


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