Aurum Wealth Management Blog

Follow the Money: Why Distinguishing Your Portfolio Matters

Behavioral finance teaches that one factor influencing prices are emotional crowds and their compulsive need for social validation. Even though we humans are a social bunch, when it comes to investing, our need for acceptance must be left at the door. For by definition, portfolios must be different than the crowd to be above average. As Howard Marks, CEO of $83 billion firm Oaktree Capital said in his note last month, "If your portfolio looks like everyone else's you may do well, or you may do poorly, but you can't do different."

We discuss valuations quite a bit, as the price one pays is a key determinant of future returns and the chances of losing money. In addition, other investors influence the path of returns, as sentiment can pressure prices on the upside and downside.

The American Association of Individual Investors (AAII) polls its members monthly on their current holdings. It goes back to 1988 and provides a range of stock, bond, and cash allocations held by the group. Today, stocks make up 67% of portfolios, above the long-term average of 60%. Each time it reached this point, it essentially stayed above average for some time in the late 1990s and mid-2000s. The current weight is below the peak in 2000 or 2007, but certainly closer to the top end of the range. Bonds now are right about at the long-term average after several years above average. Cash sits at the lows of 18%.

Where have investors been adding over the last year? According to Morningstar, the equity allocations were boosted by mutual fund flows to international equity, up $135 billion or 7% of total assets. Bond allocations fell due to the interest rate rise last year and selling thereafter.

Looking under the hood, it gets more interesting to see where investors are going with new funds. The Europe Stock category is a small one with only $22 billion in total assets, but investors feel confident about the European recovery story today, increasing net assets by 29% to Europe funds, though there were net redemptions during the heights of the Euro Crisis in 2011 and 2012. While overseas investors are not buying emerging markets, U.S. mutual fund investors increased exposure by $24 billion or 8% of assets under management. US equity allocations grew due to appreciation, but only modestly due to net flows into funds. (It should be noted this does not include flows into domestic equity ETFs, which had net issuance of $86 billion in the last 1 year period, per ICI.)

Fixed income is particularly intriguing. Investors attempted to minimize exposure to interest rates over the last year, buying Bank Loans and Nontraditional bonds (also known as unconstrained funds). They shunned the intermediate-term category. Catching most investors off-guard was the fact that interest rates fell sharply through the first five months of 2014.

The title of this note, Follow the Money, is not a literal direction for one's portfolio assets. The purpose is to point out that following where the money flows is a great way to to see how the crowd is positioned – and for understanding where and why your portfolio should be different.

For more information, please contact Aurum Wealth Management Group at 440-605-1900 or visit our website at To stay up to date with the latest investment-related news, follow us on Twitter @aurumwealth and sign up to receive our free newsletter

Important Disclosures
This material is based on public information as of the specified date, and may be stale thereafter. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice.


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