In a seemingly endless jobless recovery, it’s tough to find reasons for hope, but U.S. Bank appears to have found a pocket of optimism in wealthy investors, the people who have the most to gain or lose. A recent U.S. Bank/Harris Interactive poll of millionaire investors found the behavior of wealthy investors defied conventional wisdom during the Great Recession.
The survey was conducted between Sept. 27 and Oct. 15 among 1,609 U.S. households with investable assets of $1 million or more, and includes an oversample of eight markets, including Madison and Milwaukee. Among its key findings are that 92 percent of millionaires did not abandon the stock market, even during a fragile recovery and continued market volatility, and that 43% are currently engaged in moderate-to-heavy buying or selling.
In addition, 49% are waiting for the right opportunity to buy or sell, 20% who lost value in their investments since 2008 have already seen their investments return to pre-2008 levels, and 90% indicated their investments performed better or about the same as other investors since the beginning of 2008.
Guarded Optimism
To assess what the findings mean to investors of average means, and what they might portend for a resurgent economy in 2011, IB conducted a quick “Take Five” (five questions) interview with Darrell Behnke, senior vice president of The Private Client Reserve at U.S. Bank. Following “Take Five,” we present the remainder of the U.S. Bank/Harris Interactive findings.
IB: There seems to be a status quo type of attitude among wealthier investors, even with all the business turbulence of the past two years. In your estimation, what do they know that more reluctant investors do not?
Behnke: The investors surveyed are personally involved with their financial advisor in making investment decisions; they are not passive participants. They also understand that markets are volatile, so they didn’t react defensively. They’re getting advice, which allows them to put recent market behavior into proper perspective, and have maintained a balanced approach with their investments.
IB: Ideally, what should the average investor take away from this survey? The value of taking the long view, perhaps?
Behnke: That’s it — don’t be in a rush to make investment decisions based on today’s market or tomorrow’s. Figure out your long-term objectives and keep those in mind rather than succumbing to panic over day-to-day changes in the market. If your portfolio is diversified and appropriately balanced to fit your risk profile, you’re far more likely to reach your goals. It helps to work with a financial advisor you trust and whose services match your needs — including but not necessarily limited to investment management. Look at your financial life as a whole.
IB: I’ve heard some optimistic forecasts about stock market performance in 2011, thanks in part to the deleveraging and other recessionary steps that have taken place in publicly held companies. What’s your take?
Behnke: We view the stock market favorably in the year ahead. Politics, Federal Reserve policy, and China have all distracted investors from the very positive story of corporate earnings. Companies have cut costs so dramatically that any increase in sales will produce greater earnings. The stock market in general is fairly priced, given earnings today, which provides an opportunity for the market to go up as earnings rise, as we expect they will.
IB: People all over the place are hawking gold as a hedge against inflation. In your estimation, is that an example of an overly defensive investment strategy, or do you feel there are legitimate reasons to invest some money in gold?
Behnke: Historically, gold has been an investment to hedge against inflation or economic and geopolitical uncertainty. As part of a broadly diversified investment portfolio, at this time we like a broader basket of commodities that would not only include gold but also other precious metals, industrial metals, energy and agricultural products. Demand for materials in a worldwide expansion can provide a floor in prices, in addition to being an inflation hedge longer term. Near- term commodity prices may be softer due to an anticipated slowdown in China, but growing demand from an emerging middle class worldwide could lead to price appreciation in the future.
IB: Finally, an overall question that goes beyond the survey. What’s it going to take to get all of this money off the sidelines and back into the game?
Behnke: It is always difficult to see what will be the catalyst for change in an economic downturn, and the financial de-leveraging that has occurred makes the process slower and more painful. Eventually, investors will begin searching for a return on their money. Companies will look at opportunities to put their cash to work by acquiring competitors or expanding business lines. Already, we are seeing an expansion in capital spending by companies and consumer spending has slowly drifted upward.
As displaced real estate and manufacturing workers get retrained and re-employed, capital expenditures grow and consumer spending rises, the wall of pessimism will begin to erode and investor confidence increase. Then, “Life is good” will be a reality for many once again.
Other survey highlights also indicate that millionaires haven’t overreacted:
- Only eight percent have exited the market altogether.
- 47% say their investment risk tolerance has not changed during the last three years, and only one in 10 are unwilling to take any investment losses in the current market.
- In past three years, 47% made no change in their allocation to equities, 42% made no change in their allocation to fixed income, and 47% made no change in their allocation to cash.
- 72% say U.S. stock market performance has a major or moderate impact on their investment strategies.
What’s more, the vast majority still are in the market and looking for opportunities even though virtually all (97%) say their investments lost value at some point since the beginning of 2008. Forty-three percent are currently engaged in moderate-to-heavy buying or selling, and 49% are looking for the right opportunity.
And, finally, a note about patience: Although 20% have already seen the value of their investments return to pre-2008 levels, more than half (54%) believe it will take up to five years for their investments to get to where they were prior to 2008. This might be due in part to the fact that 45% have become more conservative with regard to their investment risk tolerance during the past three years.
Methodology Note
In addition to Madison and Milwaukee, the markets included in the survey were Cincinnati, Denver, Los Angeles, Minneapolis-St. Paul, Portland, Seattle, and St. Louis.
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