By Lance Roberts. STA Wealth
Each quarter I run a survey of investor attitudes, allocations and economic expectations to get a sense of actual “investor” behavior. In the financial markets it is easy to become“detached” from reality and assume that “everyone” is acting in a similar manner. The survey shows that this is far from being the case. What was not surprising was the makeup of survey participants.
I have often stated that the average investor has about 15 years to save for retirement. This is due to ability much more than desire. During the younger years of life there is little ability to save as wage scales tend to be lower as marriage, family and debt consume most of their income. As shown by the survey the majority of individuals are between the ages of 46-65. Furthermore, as would be expected, the majority of investors surveyed also have higher levels of education which tends to lead to higher incomes later in life.
Of course, when it comes to “saving for retirement” the most important question is whether an individual is saving enough? The survey shows that roughly half of those surveyed “think” they are saving enough for retirement with on 15% feeling as though they have more than enough.
However, much of the current “confidence” in savings has been the result of a surging stock market over the last few years. It is highly likely that when the next mean reverting event occurs that confidence will shift rather markedly.
The reason I suggest that will be the case is because of “where” the majority of investors are receiving their investment advice. As shown in the chart below the majority of investment “advice” is coming from newsletters and the internet.
This too is not surprising given the surge in the markets which tends to make individuals believe that they are “smarter than the average bear.” Success breeds overconfidence in the markets which has a long history of poor outcomes.
One interesting sidenote is that television only made up 2% of the vote which confirms the plunge in ratings that CNBC has experienced in recent years.
Not So Forgetfull
It has often been stated by the media and Wall Street analysts that the current “bull market” cycle is “the most hated in history.” The survey shows that this may indeed be the case as two nasty bear markets over the last 13 years have left an indelible stain on individuals memories and retirement accounts.
When asked what is most important to them the survey showed that, by a wide margin, the majority are more focused on loss avoidance rather than chasing stock market returns.
That mentality is reflected in their asset allocation models with the roughly on 44% invested in stocks and 48% in bonds and cash.
While the media and Wall Street chants that the markets have hit new nominal highs, the reality is far different for individuals who panic sold near the last market bottom and are only now wading back into the markets again. The loss of capital, due to both declines and inflation, combined with the loss of “available time” to save for retirement has crippled investor psychology on many levels.
The problem is that investors today have “seen this film” before and are fairly confident in how it ends. When asked about stocks the vast majority believe that stocks are current overvalued.
Conversely, most investors see bonds as part of their long term investment strategy to protect capital and create income.
It is interesting that most mainstream analysis is confused as to why individuals remain cautious despite the surge in asset prices. However, in addition to the massive beatings that investors took over the last decade, much of their caution is likely rooted in the massive divergence between Main Street and Wall Street.
“It’s The Economy, Stupid”
Following the very weak economic performance in the first quarter of the year, most economists blamed the weakness on “cold weather.” However, since we often experience “cold weather” during the winter, it is likely that the economic drag was more deeply rooted in consumer outlooks. When asked about their outlook for the second quarter of this year the response was decidedly negative with over 80% expecting the economy to perform the same or worse.
What has not been lost on individuals is that the Federal Reserve’s monetary interventions have done little to improve the quality of their lives but have vastly benefitted Wall Street. This is why despite wanting her to focus on improving economic growth, they also want her to continue tapering the current Q.E. program.
If you have been paying attention at all, what is happening in the world outside of “Wall Street” leaves little surprise in these survey results. For most, the recovery of wealth over the last few years has certainly made many individuals feel more secure about their current financial position. However, they also realize that they have only recovered most of what they lost and are unwilling, and many unable, to live through such an event again.
With the majority of individuals surveyed facing retirement in the very near future, the need to conserve principal has overtaken the desire to accumulate wealth.
As I have continually reminded you, the “real economy” is far different from the“statistical economy” as reported in government data. While the costs of living continue to increase incomes have remained stagnant. With 1-3 Americans on some sort of government assistance, and nearly as many sitting outside the labor force, it is really on a handful of individuals that are actually invested in the financial markets to begin with.
As I stated recently in “Expect Low Returns:”
“Despite the media’s commentary that “if an investor had ‘bought’ the bottom of the market…” the reality is that few, if any, actually did. The biggest drag on investor performance over time is allowing ‘emotions’ to dictate investment decisions. This is shown in the 2013 Dalbar Investor Study which showed ‘psychological factors’ accounted for between 45-55% of underperformance. From the study:
‘Analysis of investor fund flows compared to market performance further supports the argument that investors are unsuccessful at timing the market. Market upswings rarely coincide with mutual fund inflows while market downturns do not coincide with mutual fund outflows.’
In other words, investors consistently bought the ‘tops’ and sold the ‘bottoms.’ The other two primary reasons of underperformance from the study related to a lack of capital to invest. This is also not surprising given the current economic environment.”
While many dismiss the impact of the “baby boomer” generation moving into retirement, the reality is likely to be far different. If the current survey is representative of that particular group, the drag on the financial markets and economy over the next decade could be quite substantial.