A combination of a rising stock market and low interest rates has increased investor allocations to equities sharply in recent years. The average investor allocation to equities is now more than 40%, which is higher than it was at the latest peak, in 2007.
There have only been two times since World War II that allocations to stocks have been higher — after the go-go years of the 1960s and at the height of the dot-com bubble in the late 1990s. From the peak in early 2000 to the trough in early 2009, allocations to stocks were cut in half. Much of this had to do with two market crashes in which stocks were chopped in half.
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The sharp rise since 2009 also has a lot to do with the rebound since that point, but investors looking for returns have few other places to turn other than the stock market because bond yields are so low these days.
Previous high levels in equity allocations have preceded brutal bear markets. Coupled with above-average valuations, many see this metric as a reason to be cautious on stocks in the future. Although it makes sense for investors to temper their expectations for future returns after an extended period of above-average performance, there also needs to be some context attached to current investor asset allocation preferences.
The structure of the stock market has changed drastically over the years. While households used to have a stronghold on stock ownership, professional investors now hold sway, as you can see in the following chart from Goldman Sachs.
Although there are concerns about the impact of exchange-traded funds on the markets they still account for a relatively small share of equity ownership. Hedge funds have an even smaller market share. Households and mutual funds dominate, but the market ownership structure is much more diversified than it was.
This diversification has given investors many different avenues to access the stock market. In the past, investors were beholden to brokers to suggest securities on their behalf, but the advent of mutual funds, ETFs, target-date funds and financial advisers have all changed the investment landscape and the way investors allocate their assets.
Another huge development in recent decades was the addition of defined-contribution plans, such as 401(k)s and individual retirement accounts. You can see that taxable holdings of stocks have been dwindling, while tax-deferred retirement accounts now make up a much larger piece of the equity ownership pie:
Steven Rosenthal and Lydia Austin estimate "that the share of U.S. corporate stock held in taxable accounts fell more than two-thirds over the last 50 years, from 83.6% in 1965 to 24.2% in 2015."
Here's another way of viewing this sea change:
