AAII Members Found to Have Better Allocation Skills

AAII members as individual investors tend to slightly increase and decrease the stock allocation of their portfolios in reaction to the performance of the market, according to a third-party study of responses to AAII’s monthly Asset Allocation survey.

The study analyzed 30 years of members’ self-reported asset allocations from 1987 to 2017, reported in the major categories of stocks, bonds and cash. Equity return (stocks) was represented by the S&P 500 index, fixed-income return (bonds) was represented by the Bloomberg US Bond Aggregate index and the risk-free return (cash) was taken from the Kenneth French Data Library.

On average, AAII members hold portfolios made up of about 61% stocks, 16% bonds and 23% cash. During periods in which equity asset returns were higher than those from fixed-income and risk-free assets, the average stock allocation increased to 77%, while during periods in which equity asset returns were lower than those from fixed-income and risk-free assets, the average stock allocation decreased to about 45%.

To assess the market timing ability of individual investors, the study’s author subtracted the stock allocation when equity assets underperformed from the allocation to stocks when equity assets outperformed, to come up with a stock adjustment score.

As a control for the study, they also created two passive investors, one who held the average and one who held median stock allocations for a given year, as reported by AAII members. Passive investors rebalanced their portfolios once per year, in contrast to AAII members’ monthly reported rebalancing.

Over 30 years, AAII members and the artificial passive investors allocated more of their assets to stocks during years of equity overperformance than they allocated to stocks during years of equity underperformance. However, AAII members showed better market-timing skills, as their positive stock adjustment score was 67% and 88% higher than those of the average and median passive investors, respectively.

The study also analyzed AAII members’ market timing ability during bull and bear markets. In bull markets, AAII members improved their positive stock adjustment score more than the two passive investors. In bear markets, AAII members did a better job improving their stock adjustment score than the average and median passive investors.

Source: “Do Individual Investors Successfully Time the Market?” by Javier Rodriguez; The Journal of Investing, April 2020.