Tendencies To Dump Dollars Into Equities – Are Investors Blind To Risk?

Recently, the Asset Owners Disclosure Project (AODP) asked the thousand largest asset owners of the world to share what steps they were taking to guard themselves against the possible risks of investment? What if their investments in fossil fuels and other assets turned out to be worthless in the near future? In fact, the investors are asking themselves whether they’re done with all the excitement of 2013 stock market rally and whether it has distracted them from the looming risks. As per reports by the Acertus Market Sentiment Index, a monthly measurement of the attitudes of the investors towards taking on risk, reported a 45% hike in risk tolerance by the end of 2013. This statistic has put the current market in the 86th percentile relative to all the historical measures of risk tolerance.

This is nothing but an indication of the growing willingness of the investors to accept increased risk, a trend that is consistent with recent media reports of increasing risk tolerance among the investors. Among the 5 indicators, 3 of them that the AMSI consisted of signalled concern. For instance, the momentum of price that measures the magnitude and speed of increase in the asset price, scored in the 86th percentile. This kind of unyielding and rapid rise in prices may sometimes suggest that the investors are going through or rather donning a “herd mentality” and they’re ruthlessly dumping money into equities without being able to chase gains or consider losses.

This particular report of the investor behavior was particularly backed by a low reading for volatility that is based on the standard deviation of S&P 500 index returns over the past month. If there is more fluctuation, this might suggest more and more engaged investors who are showing lack of volatility. The investors are actually getting lazy and they’re also expecting or predicting low volatility while moving forward with their investments.

The spread between the interbank lending rate and the returns on the three-month Treasury Notes is pretty narrow, thereby suggesting that the investors see restrained macro-economic risk. Even the spread between high-quality and lower-quality debt is pretty low in the 37th percentile, suggesting that the credit risk is also not being considered as a major concern as well. The major investment experts wouldn’t have ever relied on a single variable but when many of them start moving together, this is a strong sign that the investors might be gradually trying to pay attention. The investors might just get a bit too sloppy while putting their dollars into the market and by ignoring any kind of risk.

The sell-off of Pimco’s Total Return bond fund and the purchasing of stock, including the mutual funds of Vanguard, is yet another symbolic event. However, the rapid rise in the values and prices of the equities isn’t always a sign that the investors are too enthusiastic about risk. There are several other reasons behind the current prices being rational. They may include low interest rates, high expected earnings growth, strong earnings and a lower risk premium.