Don't Abandon Diversification Because of This Year's Rough Patch

• Given today’s drop, I posted data in our Allocation Strategies community showing where the S&P 500 currently is relative to past drops in the market.


• The portfolio strategy insights and suggestions given by Vanguard chairman emeritus Jack Brennan in October 2021 may well be worth rereading now.


• The new May AAII Journal is now online. In it, we discuss the impact war and inflation have had on mutual fund and exchange-traded fund (ETF) returns.


• We also discuss our earnings estimate revision screens in the May issue of the Journal. The upward revision screens help you find potentially attractive stocks that analysts have become more optimistic about.


• In Step M, Lesson 2 of the PRISM Academy, we discuss how to effectively monitor your allocation. The aim is to determine if your portfolio continues to be properly allocated relative to your goals and tolerance for risk. Click here to complete Lesson 2.




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The results from the latest AAII Sentiment Survey show the percentage of individual investors describing their outlook as “neutral” falling to its lowest level in 18 months. In addition, optimism rebounded while bearish sentiment pulled back.

Bullish sentiment, expectations that stock prices will rise over the next six months, jumped by 10.4 percentage points to 26.9%. The big move was not enough to prevent optimism from staying below its historical average of 38.0% for the 24th consecutive week. Bullish sentiment also remains at an unusually low level for the 14th time out of the last 17 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell by 3.9 percentage points to 20.3%. Neutral sentiment was last lower on November 11, 2020 (19.3%). The historical average is 31.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 6.5 percentage points to 52.9%. This is the 23rd time out of the last 24 weeks that pessimism is above its historical average of 30.5%. It is also the 13th time out of the last 16 weeks that bearish sentiment is at an unusually high level.

At current levels, bullish sentiment, neutral sentiment and the bull-bear spread (bullish minus bearish sentiment) are all unusually low. Meanwhile, bearish sentiment is unusually high. It is rare for all four indicators to be at unusual levels on the same week.

Historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and for the bull-bear spread. Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500.

Most of the responses to this week’s survey were registered before the statement from yesterday’s Federal Open Market Committee meeting was released, which announced a raise in interest rates.

The ongoing invasion of Ukraine by Russia, stock market volatility, inflation, interest rates, the coronavirus pandemic and politics are all influencing individual investors’ outlook for stocks. Other factors include the economy and corporate earnings.

In this week’s special question, we asked AAII members whether they think other investors are currently too bullish or too bearish.

Slightly more than half of respondents (54%) feel that other investors are too bearish. Many of these respondents believe that some of the market’s uncertainty is already reflected in prices. Conversely, 19% of respondents say that other investors are too bullish. Many warn of an impending recession attributed to inflation and the Russia-Ukraine conflict. Around 18% of respondents express a neutral or moderate outlook and/or feel that other investors are gauging the market correctly in terms of bullishness or bearishness.

Here is a sampling of the responses:

• “Too many people are waiting for the flush to buy (capitulation). A lot of doomers who missed out on major gains in 2021 are salty and want the market to crash and go back to the old ways. I think we will finish 2022 at the highs.”
• “Probably a bit too bearish but that’s because polls like this one are as bearish as I’ve ever seen and unemployment is near as low as I’ve ever seen. Quite the conundrum.”
• “Perhaps a little bullish. We still don’t know what effect the Federal Reserve raising interest rates will have going into an already contracting economy.”
• “Too bullish, don’t fight the Fed! As long as the Fed is pursuing an aggressive tightening policy, stay away from stocks!”
• “About right.”

Individual investors’ cash allocations grew for the fifth consecutive month according to the April AAII Asset Allocation Survey. At the same time, fixed-income allocations fell to a 14-year low.

Stock and stock fund allocations increased by 1.4 percentage points to 69.8% in April. Equity exposure was last higher in December 2021 (70.5%). Last month was the 23rd consecutive month that AAII members’ exposure to equities was above the historical average of 61.0%.

Bond and bond fund allocations fell by 1.6 percentage points to 12.6%. Allocations were last at this level in June 2008. Fixed-income exposure remains below its historical average of 16.0% for the 14th consecutive month.

Cash allocations increased by 0.2 percentage points to 17.6%. They were last higher in November 2020 (18.4%). April was the 24th consecutive month that cash allocations have been below their historical average of 23.0%.

Equity allocations were back at an unusually high level for the 12th time in the past 14 months. Fixed-income allocations, conversely, fell to the lower end of their typical historical range. The breakpoint of typical and unusually low fixed-income allocations is 12.2%.

In our weekly AAII Sentiment Survey, optimism was below 20% twice in April, indicating that individual investors change their allocations much less frequently than their short-term expectations. Since 1987, there have only been 35 weeks when bullish sentiment was below 20%.

Though many individual investors expect the stock market to either fall or stay relatively unchanged over the next six months, the combination of inflation, tightening monetary policy and still historically low yields are keeping an unattractive light on bonds. In addition, many AAII members follow a long-term approach to investing.

• Stocks and Stock Funds: 69.8%, up 1.4 percentage points
• Bonds and Bond Funds: 12.6%, down 1.6 percentage points
• Cash: 17.6%, up 0.2 percentage points

• Stocks: 33.3%, up 1.8 percentage points
• Stocks Funds: 36.6%, down 0.4 percentage points
• Bonds: 2.8%, up 0.3 percentage points
• Bond Funds: 9.8%, down 1.9 percentage points

• Stocks/Stock Funds: 61.5%
• Bonds/Bond Funds: 16.0%
• Cash: 22.5%

Take the Asset Allocation Survey.

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