The Changing Mosaic of Investment Patterns

TIAA-CREF Institute is a part of TIAA-CREF and the views expressed herein are those of the author(s) and not necessarily those of TIAA-CREF. In the context of the late 1990s stock market bubble and its aftermath, Peter Bernstein and others have suggested that volatile short-term trends and the availability of a wider range of asset classes may call for a more fluid asset allocation strategy that goes beyond the standard model of a stable policy allocation. This paper considers three basic questions: (1) based on recently available data on institutional and individual asset allocation, how do different types of investors respond to equity market movements, (2) how should we understand these different behaviors, and (3) what implications do these behaviors hold for equity markets? We then incorporate our findings into an integrated rebalancing model that could be used as a framework for developing more proactive allocation strategies. This paper considers three basic questions: (1) how do different types of investors respond to equity market movements, (2) how should we understand these different behaviors, and (3) what implications do these behaviors hold for equity markets? We then incorporate our findings into an integrated rebalancing model that could be used as a framework for developing more proactive allocation strategies. A great deal of research attention has been given to the subjects of asset allocation and market volatility, but our focus is somewhat different. Much of the asset allocation tradition, at understanding optimal portfolios and efficient frontiers (a recent general treatment of this topic Campbell and Viciera [2002]). Specific issues include the appropriateness of optimal asset allocation models and methods (Elton and Gruber (Sharpe [2002]), and other topics. And others have become interested in the effects of 1 shareholder ownership on stock returns (among others, Gompers and Metrick [2001], Hotchkiss and Strickland [2003]). In the context of the late 1990s stock market bubble and its aftermath, the widespread interest in asset allocation and market volatility has taken on new meaning. Most important for our purposes, Peter Bernstein [2003a] [2003b] and others have suggested that, even if markets are efficient in the long run, volatile shorter-term trends and the availability of a wider range of asset classes may call for a more fluid strategy that goes beyond the standard institutional model of a relatively stable policy allocation. Our work focuses on three basic topics. First, sparked by data that have recently become available, the …