Household Stock Allocation

Anthony Judson Lawrence: Mrs Allen, now I don't mean to pry, but I assume that you have some stock--General Motors, General Electric--something like that.
Mrs. J Arthur Allen: Well, doesn't everyone?
--The Young Philadelphians

Interesting graph showing percentage of household assets allocated to equity vs subsequent 10 year stock market returns. We're near the high end currently, with slightly more than 50% of household assets in stocks.

The bad news is that subsequent returns following these peaks have historically not been impressive. When household allocations toward stocks have been in the upper quintile (as they are now), market returns 10 yrs later have averaged about 4%.

On the other hand, equity allocations in the bottom quintile have preceded rosier futures--with market returns averaging ~16% a decade later.

An implication is that households tend to buy high and sell low. They add exposure as markets rise, and they cut exposure as returns fall.

Consequently, household asset allocation toward stocks serves as a contrarian indicator of sorts.