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Updated on Monday, March 4, 2019
With the stock market closing out 2018 in a violent succession of swings, investors have been paying even more attention to any news that could offer them a semblance of certainty on how their money will perform.Americans are placing record levels of assets in the stock market, according to an analysis of fund flow data (the data showing the net inflow and outflow of cash to and from financial assets, such as stocks, bonds and bank deposits) by MagnifyMoney. At the end of December 2018, Americans had placed nearly two-thirds — 62.2% — of their investable assets into stock, as opposed to cash, bonds or money market funds.
This uptick in stock investments could point to renewed confidence in the economy, or simply reflect how the overall increased value of the stock market causes the value of stocks held by households to appreciate and take up a greater share of total wealth invested in the market.
However, for those who have tracked household investment trends in relation to economic downturns, this recent news could be troubling. We saw a similar picture emerge prior to the 2007-2008 recession when 61.6% of American households’ wealth was held in stocks.
What’s more, Americans’ investable assets now claim a greater share of their overall wealth. Data from the Federal Reserve show 35% of households’ wealth lies in the stock market, a level last seen in 2000 — just before the dot-com bubble burst.
Americans’ record-level love for the stock market has come at the expense of saving products. For every dollar Americans have in the bank, they hold $2.51 worth of stock in the market, which is the highest that ratio has been since 2000. This eye-popping ratio isn’t because people have soured on banks — deposits have grown by 45% during the past 10 years — but is a testament to how popular investing in stocks has grown.
How to strike the right investment balance
While it’s possible the new analysis shows nothing more than investors’ confidence in the stock market, those worried if it’s time to sell and run should take a moment before pulling all of their wealth out of stocks and into cash, advises Josh Rowe, investment product manager for LendingTree, the online loan marketplace and parent company of MagnifyMoney.
“First and foremost, [investors] should stay disciplined,” he said. Maintaining a balance between stocks and cash helps protect your savings from inflation, so long as you invest in stocks you can reasonably expect to deliver returns higher than the pace of inflation. Taking all of your money out of the market and putting it in a savings account might protect it from a hypothetical market downturn, but inflation would surely and steadily devalue the purchasing power of that money, effectively shrinking your savings.
To help you avoid making a mistake you may later regret, Rowe recommends the following:
Take a good, hard look at your portfolio. While you probably don’t want to make any major changes to your investment strategy based on this new analysis, it does provide a good excuse for you to review how much of your wealth you have invested in stocks and whether that amount still makes sense. The value of stocks can appreciate over time, and maybe you now have more wealth in the market than you originally wanted, in which case you may want to consider allocating some of that money somewhere else, such as a savings account or CD.
Weather the storm — if you can stomach it. Even if you feel certain the stock market is on the verge of bottoming out and stockbrokers are about to start flying out of windows, you can’t predict the future. Pulling out all or most of your money from the stock market is rarely the smart move, even during the worst of times. For example, investors in retirement plans who stayed in the market after the crash in 2008 saw their account balances grow by 50% more than those who fled the market, according to a survey commissioned by Fidelity 10 years after the crash.
Change the future, not the past. Instead of uprooting all of the money you currently have in stocks, investors might opt to direct their future investable income away from the market. This way, you gradually decrease your exposure to what could be an underperforming market without blowing up your entire investment strategy. This is a strategy commonly seen with older investors as they approach retirement and have fewer working years ahead.
MagnifyMoney looked at data from the Federal Reserve, the Investment Company Institute and Cboe Global Markets to determine the percentage of household financial assets invested in stocks, bonds and cash since 2000.