Interesting Reading that sparked my thoughts.
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According to the Global Market Portfolio the world is something like 60% fixed income and 40% equity.
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In economics there is an "Equity Risk Puzzle" which is why do stocks return so much more than bonds given reasonable estimates of risk aversion?
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Most sophisticated individual investors are not in 40/60 portfolios. We are are probably 60-80% equity on average. Thus the global market is being skewed by something other than the typical sophisticated individual investor.
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Who exactly then, is owning all the bonds? Are bank CDs included in this figure? Or would it be insurance companies (I know NYL, e.g. is 88% in fixed income)
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Assuming insurance companies are sophisticated investors, why are they overinvested in fixed income? Couldn't they grow their wealth more with just a bit more equity? Is it because of liability matching? Would insurance customers be better off in theory if they allowed the insurance company to hold more equities in exchange for cheaper premiums but a probability that the insurance payout would be diminished by a market crash? Or would this undermine the entire idea of insurance?
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Can the ERP be explained simply by low-income househoulds not having the capital to invest in the stock market so most of their wealth is tied up in checking accounts and insurance companies, so basically 100% fixed income?
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If the previous point is true, does this mean that income inequality is good for people at the top, because it means stock returns will get bid up due to the glut of fixed income and shortage of equity capital?
In my own limited experience, a lot of people simply don't invest in the stock market. I know people who put 100% of their savings into bank CDs. I don't know how significant this is in the big picture, but it's something.
Submitted February 04, 2017 at 07:20PM by bpg609 http://ift.tt/2l5Ds41
