Who Owns The World's Financial Assets? And Why Are U.S. Households So Fascinated With Stocks?

I came across an interesting report from McKinsey Global Institute. The report includes a breakdown of the ownership of the world's financial assets as of the end of 2010. I used their information to make the below chart. 

What is interesting is the U.S. fascination with equities. It should be noted that the definition of financial assets in their report excludes "the value of real estate, derivatives, physical assets such as gold, and equity in unlisted companies."  The total value of the world's financial assets equaled $198.1 Trillion and the total value of all equities equaled $53.7 Trillion. Clearly equities, bonds, bank deposits and such are massively overshadowed by the notional value of the derivatives market which is over $700 Trillion.

Drilling down to the household level in the US reveals some more interesting observations. However, unfortunately this does not include retirement accounts (but that would only increase the equity allocation since US retirement accounts hold about a 60% allocation to stocks).

The yellow line in the graph is the inflation-adjusted S&P index. You can see how long-term market trends have affected investors asset allocations through time, with investors predictably increasing/decreasing allocations at the wrong times. But I think what is clear here, is that everyone who is saying that investors are too pessimistic.....they don't know what true pessimism looks like. Investor pessimism in the US looks more like their allocations in 1945-1950 or 1975-1990. Coincidentally, that is also when generational buying opportunities presented themselves......Sorry folks, now is not a generational buying opportunity by any stretch of the imagination, despite all those who use idiotic forward PE ratio's or useless graphs of the "fed model" to tell you otherwise. Please see below some more useful market valuation indicators which actually have a strong correlation with subsequent longer-term returns (this chart is from Doug Short at Advisor Perspectives)

The market is by no means cheap. In fact, it has only been more expensive than this (based on the Shiller PE10 ratio) about 20% of the time (and those resulted in poor longer-term returns). 

If you want to see true investor pessimism towards stocks, then look no further than Japan

And a sampling of some other countries........

I have little doubt that as the US population continues to age and the younger generation gets a sour taste in their mouth regarding stocks we will see the overall allocation to stocks by US investors continue to decline, then finally when everyone believes stocks are a losers game, it will finally be the next generational buying opportunity.