Taxes, Portfolio Management and Emotional Pain

Posted on April 4, 2013 | Investor Update

Loss aversion may cause some investors to make portfolio decisions based primarily on the tax consequences instead of on strategies intended to provide a long-term benefit. The short-term pain of tax payment is felt more than the future pain of the increased volatility stemming from a portfolio that is not properly allocated. This is a conclusion I’m reaching from reading some of the comments to the articles about rebalancing in the April AAII Journal and what I’ve been learning about behavioral finance.

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AAII Sentiment Survey: Neutral Sentiment at Highest Level Since 2011

Posted on April 4, 2013 | AAII Survey


Neutral sentiment is at highest level since December 22, 2011 in the latest AAII Sentiment Survey. The rise in neutral sentiment is occurring as both short-term optimism and pessimism are falling among individual investors.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 2.9 percentage points to 35.5%. This is the third consecutive weekly decline. It also puts optimism at its lowest level in a month. The historical average is 39.0%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 3.4 percentage points to 36.3%. As noted above, this is the highest neutral sentiment has been in more than 16 months. It is also the first time neutral sentiment has been above its historical average of 30.5% on consecutive weeks since October 4 and October 11, 2012.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 0.5 percentage points to 28.2%. This is a nine-week low for pessimism. The historical average is 30.5%.

The last time both bullish and bearish sentiment were below their respective historical averages on consecutive weeks was August 2 through August 16, 2012. The second-most-recent occurrence was on February 25 and March 4, 2010.

The declines in optimism and pessimism are not significant as both bullish and bearish sentiment remain close to their historical averages. While the major indexes continue to trade near record or multi-year highs, AAII members are mixed about what the next six months will bring in terms of market direction. Some members are encouraged by this year’s gains, while others fret that stocks are overbought and are due for a pullback. Also impacting sentiment are mixed views about the pace of economic growth and ongoing frustration with Washington.

This week’s special question asked AAII members which industries and sectors they like right now. Energy, including master limited partnerships, received the most votes, listed by 30% of respondents. Health care came in second with 23% of respondents favoring the sector, technology was a close third (21%) and financials came in fourth (14%). When we asked the same question last September, AAII members favored energy, health care, commodities and technology.

This week’s AAII Sentiment Survey results:

  • Bullish: 35.5%, down 2.9 percentage points
  • Neutral: 36.3%, up 3.4 percentage points
  • Bearish: 28.2%, down 0.5 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.6%
  • Bearish: 30.6%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.) The survey and its results are available online at: http://www.aaii.com/sentimentsurvey



Sell of the week 4/3/2013

Posted on April 3, 2013 | Podcast

AAII Journal Editor Charles Rotblut Editor explains to Chuck Jaffe of MarketWatch why Goodyear Tire & Rubber (GT) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week





BUY OF THE WEEK 4/2/2013

Posted on April 2, 2013 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Eli Lilly (LLY) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the Week





March AAII Asset Allocation Survey: Cash Allocations at a 16-Month High

Posted on April 1, 2013 | AAII Survey

Cash allocations reached a 16-month high in March, according to the latest AAII Asset Allocation Survey. Individual investors pulled money from both equities and bonds last month.

Allocations to stocks and stock funds fell 3.0 percentage points to 59.5% in March. During the past 15 months, equity allocations have not varied significantly, instead staying within a range of 58.8% (June 2012) to 62.5% (February 2013). The historical average is 60%.

Bond and bond fund allocations declined 1.5 percentage points to 17.7%. This is the smallest allocation to fixed-income securities since February 2011. It is also the 45th consecutive month that bond and bond fund allocations are above their historical average of 16%.

Cash allocations jumped 4.6 percentage points to 22.8%. This is the largest percentage of portfolio assets held in cash since November 2011. Even with the increase, cash allocations remained below their historical average of 24% for the 16th consecutive month.

The rise in cash levels comes as individual investors are grappling with two events. The first is the strong first-quarter performance for stock prices. While some AAII members are more optimistic about the short-term outlook for stocks, others fret that stocks are overbought and are due for a pullback. At the same time, this year’s upward move in Treasury yields and continued signs of economic growth may have caused some investors to reduce their exposure to bonds.

March AAII Asset Allocation survey details:

  • Stock Funds: 27.7%, down 1.6 percentage points
  • Stocks: 31.8%, down 1.4 percentage points
  • Bond Funds: 12.4%, down 3.0 percentage points
  • Bonds: 5.3%, up 1.5 percentage points

March AAII Asset Allocation Survey results:

  • Stocks Total: 59.5%, down 3.0 percentage points
  • Bonds Total: 17.7%, down 1.5 percentage points
  • Cash: 22.8%, up 4.6 percentage points

Historical Averages:

  • Stocks/Stock Funds: 60%
  • Bonds/Bond Funds: 16%
  • Cash: 24%

The AAII Asset Allocation Survey has been conducted monthly since November 1987 and asks AAII members what percentage of their portfolios are allocated to stocks, stock funds, bonds, bond funds and cash. The survey and its results are available online at: http://www.aaii.com/investor-surveys.

Charles Rotblut. CFA is a Vice President with the American Association of Individual Investors and editor of the AAII Journal.



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