NEW YORK--(BUSINESS WIRE)--The Wells Fargo/Gallup Investor and Retirement Optimism Index jumped in the third quarter to its highest level since mid-2007. The index, which gauges investor optimism, stands at +79, up from +62 in the second quarter. The gains have been driven by improved investor sentiment about the stock market, as 51% of investors are now “very” or “somewhat” optimistic about the 12-month outlook for the markets, up from 42% last quarter. The index surged among retired investors — rising 36 points to +81 as they became more optimistic about the stock market and maintaining their household income.
These findings are from the third-quarter Wells Fargo/Gallup Investor and Retirement Optimism Index survey conducted by telephone with 1,021 U.S. investors from August 5 to 14.
Investor Perceptions: Market Volatility and Low Rates
Half of investors (52%) say stock market volatility, rather than continued low interest rates (38%), is the greater threat to their portfolio over the long-term. Non-retirees are especially likely to say stock market volatility is the greater source of concern (57%), versus 34% who are more concerned about low rates. On the other hand, 47% of retirees feel continued low interest rates are a greater problem, versus 41% of retirees who fear market volatility over low rates.
When investors were asked to choose whether low interest rates or high interest rates are better for their own financial situation today, 63% of all surveyed say they prefer low interest rates, and this surges to 71% of non-retirees. However, this is not the case for retirees, of whom 41% said they prefer low rates. A third of all investors said they prefer high interest rates.
“Most people who are not yet retired have a consumer mindset when they consider the benefit of low rates because they like their loans to cost less. However, people must also consider the impact of low rates on long-term investing. The way to navigate through low rates as an investor is to build a diversified portfolio that has the potential to sustain itself through volatility and the challenges of a low-rate environment,” said George Rusnak, co-head of global fixed income strategy for Wells Fargo Investment Institute.
Investors Favor Cash and Want to Avoid Risk
According to the survey, 43% of investors say they have moved their money to cash or cash equivalent savings over the past year — far more than those moving money to stocks or bonds. Following movement to cash, 29% say they moved money to stocks or mutual funds in the last year, while 20% say they moved money to “other investments.” Fewer investors (13%) have moved money to CDs or money market accounts, and 10% have moved money to bonds.
Investors are clear about their aversion to risk with 59% saying they are only willing to take on “a little risk” (44%) or “no risk at all” (15%). About 40% say they are willing to take on “a lot of risk” (5%) or a “fair amount” (35%) of risk.
“While investors are concerned about market volatility and taking on risk, people actually run the risk of being complacent as they avoid potential stock market risk. Market avoidance may not allow people the chance to grow their money over time,” said Rusnak.
Return Expectations and Asset Allocations
According to the study, the average annual rate of return investors expect to realize on their investments this year is 7%. This is in line with the performance of a globally diversified portfolio, which has been up about 7%* so far in 2016. However, nearly one in five investors (18%) think they will earn over 10% on their investments this year. Wells Fargo Investment Institute’s report, Fuel for Growth, forecasts most returns to be below historical averages in this environment.
The survey asked investors how their savings and investments are currently allocated. Respondents report having an average of 35% of their savings and investments in stocks or stock mutual funds and 10% in bonds or bond funds. Investors also revealed they have an average of 19% in cash savings and 11% in CDs or money market accounts — allocations that are earning little to no interest. An additional 12% of investors’ portfolios are in “other investments,” which could include real estate, gold or other commodities and alternative investments.
Investors Unclear on the Basics of Bonds
When the survey asked investors what happens to bond prices when interest rates go down, over half (54%) admit they don’t know. Only 22% correctly identified the inverse relationship whereby bond prices typically go up when interest rates go down. Another 17% think the two move in the same direction.
“This prolonged low-interest-rate environment highlights how beneficial it is for investors to understand the mechanics of bonds and how they play a part in long-term growth opportunities,” said Rusnak.
Underscoring the need for more education about bonds, only 31% of investors say they have a very good understanding of the difference between stocks and bonds — another 43% understand it somewhat well, while 26% say not too well or not at all.
Presidential Election Sparks Market Concerns
Although investor optimism is reaching nine-year highs, the upcoming presidential election has the potential to rattle it. More than six in 10 investors (62%) strongly agree they are “worried” about how the outcome of the presidential election will affect the financial markets and another 25% somewhat agree. Only 13% disagree. A higher proportion of investors aged 18 to 49 are highly worried than those aged 50 and older, 68% vs. 57% respectively. Also, more women investors than men are highly worried about the impact the outcome of the election may have on the market: 69% vs. 56%.
Retirees Carefully Spending Down Savings
This quarter, the survey asked retirees about their approach to managing their retirement savings and investments. Four in 10 retired investors (42%) say they are carefully spending down their retirement savings so it lasts as long as they need it. A similar proportion (38%) is trying to keep their nest egg intact but living off the interest as well as Social Security. Meanwhile, just 16% of retirees are in a position to increase what they have saved for retirement. Three-quarters of retirees (76%) are confident they can maintain their chosen approach throughout their retirement.
“Achieving a consistent and solid rate of return on investments is critical for retirees to stick with their financial goals. Having a diversified portfolio through market volatility and low interest rates may help accomplish this,” Rusnak said.
For more information and investment strategies to consider, read What Role Can Bonds Play in a Portfolio (PDF) from Wells Fargo Investment Institute.
*40% Barclays Multiverse TR USD, 40% MSCI ACWI GR USD, 5% FTSE EPRA/NAREIT Developed TR USD, 5% Bloomberg Commodity TR USD, and 10% HFRX Global Hedge Fund USD. As of 8/31/16.
About the Wells Fargo/Gallup Investor and Retirement Optimism Index
These findings are part of the Wells Fargo/Gallup Investor and Retirement Optimism Index, which was conducted Aug. 5-14, 2016, by telephone. The Index includes 1,021 investors randomly selected from across the country with a margin of sampling error of +/- four percentage points. For this study, the American investor is defined as an adult in a household with total savings and investments of $10,000 or more. About two in five American households have at least $10,000 in savings and investments. The sample size is comprised of 71% non-retirees and 29% retirees. Of total respondents, 43% reported annual income of less than $90,000; 57% reported $90,000 or more. The Wells Fargo/Gallup Investor and Retirement Index is an enhanced version of Gallup’s Index of Investor Optimism that provides its historical data. The median age of the non-retired investor is 47 and the retiree is 68.
The Index had a baseline score of 124 when it was established in October 1996. It peaked at 178 in January 2000, at the height of the dot-com boom, and hit a low of negative 64 in February 2009.
About Wells Fargo
Wells Fargo & Company (NYSE:WFC) is a diversified, community-based financial services company with $1.9 trillion in assets. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,600 locations, 13,000 ATMs, the internet (wellsfargo.com) and mobile banking, and has offices in 36 countries and territories to support customers who conduct business in the global economy. With approximately 268,000 team members, Wells Fargo serves one in three households in the United States. Wells Fargo & Company was ranked No. 27 on Fortune’s 2016 rankings of America’s largest corporations. Wells Fargo’s vision is to satisfy our customers’ financial needs and help them succeed financially. Wells Fargo perspectives are also available at Wells Fargo Blogs and Wells Fargo Stories.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
About Gallup
Gallup delivers analytics and advice to help leaders and organizations solve their most pressing problems. Combining more than 80 years of experience with its global reach, Gallup knows more about the attitudes and behaviors of employees, customers, students and citizens than any other organization in the world.