As recently as last summer and fall, respondents to BlackRock’s Global Investor Pulse Survey indicated that they held nearly half of their portfolio in cash and intended to increase that exposure over the coming year. More recent surveys tell a similar story.
But despite perceptions that investors hold a lot of cash and are still quite risk averse, my team’s analysis of the Federal Reserve’s (Fed) latest data on household financial assets suggests a somewhat different reality.
According to the Fed’s data, the share of household financial assets devoted to cash and highly-rated government bonds has been drifting lower since the end of the financial crisis and has actually fallen below the long-run average.
Meanwhile, the same Fed data also show that investors have steadily moved into ever riskier investments, especially during the recent equity bull market. Americans now hold the largest percentage of their financial assets in stocks, corporate bonds and mutual funds – a loose proxy for exposure to riskier investments – since the third quarter of 2000, near the height of the tech bubble.
The percentage of investors’ financial assets in such riskier investments is now 34.9%, just shy of the highest exposure to risky assets since the 1950s – 38.4% in the first quarter of 2000.
Behind the Shift to Riskier Investments
Part of the shift to riskier investments and away from safety is structural in nature, but much of it is cyclical.
The structural part involves the increased use of mutual funds, which have grown steadily since their introduction in the early 1980s and now account for nearly 10% of household financial assets. While mutual funds offer investors a liquid means of gaining diversified exposure to a wide variety of asset classes, around 75% of mutual fund holdings outside of money market investments are invested in stocks and corporate bonds.
At the same time, investors have also raised their risk exposure, perhaps unknowingly, due to financial market dynamics as the bull market enters its sixth year. A near trebling in equity market values and a steep decline in credit spreads since the height of the financial crisis have prompted investors to rotate back into stocks and corporate bonds. But, absent systematic rebalancing, this rotation has pushed portfolios into ever greater exposures to riskier assets, given the outperformance of stocks and corporate bonds over traditional bonds and cash during the past few years.