Investing

Are Rich Investors About to Get Crushed?

By John Del Vecchio  |  July 13, 2018

No, I’m not talking about you, Rich Investor readers. I’m talking about individuals with huge stock positions.

These folks are neck-deep in the market. And while that might read as “confidence” to some, to me it reads “the other shoe is going to drop.”

We’re quickly closing in on the longest bull market in history, and it’s been a great ride.

Unfortunately, with investors and speculators leaning so heavily to one side, it could get nasty when the worm turns.

Merrill Lynch recent published a report indicating that its wealthiest clients’ cash positions as a percentage of their assets under management are at a low for this cycle.

GWIM cash allocation line graph

Private clients (aka rich folks) hold their lowest cash position since just before the financial crisis.

You know, the one that turned a lot of 401(k)s into 201(k)s. Then, when the market bottomed, investors were flush with cash.

At exactly the wrong time.

Given their track record, I would consider private-client cash positions to be a contrary indicator.

That means it’s time to get cautious.

Since cash positions are at lows for the cycle, that means investors are, well, fully invested.

There’s little fresh capital waiting in the wings to buy stocks and boost prices. Everyone’s loaded to the gills.

But here’s where it gets even more disconcerting…

The beta, or the “juice” of their portfolios, has revisited the peak for this cycle and is at a much higher level than just before the 2008 crash.

Beta of top 20 GWIM stocks to S&P500

A beta over 1.0 means that a portfolio is likely to make disproportionately large moves relative to the market.

Back in 2008, the beta of private clients’ top 20 stock holdings stood at about 0.85. Now it’s over 1.0.

That means you can expect losses to be magnified.

Additionally, everyone owns the same stocks because of substantial inflows into market index funds.

That means there will be nowhere to hide when the reckoning comes.

Market valuations are stretched. Volatility is low. Investors are fully loaded into aggressive stock positions. Now’s not the time to have your head in the sand, even if you like the view.

John Del Vecchio

Author of Rule of 72: How to Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio, John is a forensic accountant at heart. Standing on the shoulders of the great David Tice, James O’Shaughnessy and Dr.MORE FROM AUTHOR