High net worth investors, following the European debt crisis with growing trepidation, appear to be placing an even higher premium on diversification and risk, according to Millionaire Corner research.
The spotlight is focused primarily on Greece, which faces June 17th elections that could ultimately determine whether the debt-strapped nation remains in the eurozone. In the meantime, Greece could run out of money as soon as July, according to Michelle Gibley, Director of International Research for the Schwab Center for Financial Research, if lower-than-expected tax returns fail to carry Greece over to its next quarterly bailout funding on August.
"We believe the probability of a Greek exit increases as the year progresses and over the next several years,” wrote Gibley in an analysis on the Schwab website. “Greece is likely to need continual relaxation of bailout targets, which will become increasingly unpalatable to the electorate in financially stronger countries."
It’s increasingly apparent the crisis could spread to Spain and Italy, according to Gibley, and fears of “contagion” are feeding market volatility. “As a general rule, markets hate uncertainty, and there’s a lot of it in Europe right now,” said Gibley. “European markets are likely to experience bouts of volatility over the next year or longer. "
High net worth investors are closely monitoring the European debt crisis and other world events. Seventy percent of the high net worth – individuals with investable assets of $5 million to $25 million – said they are paying more attention to global economic events because of the increasing impact the events are having on their wealth, according to a Millionaire Corner study conducted over the first quarter of 2012.
Nearly 80 percent of the wealthiest high net worth investors – those with $15 million to $15 million to invest – said the European debt crisis has affected or will affect the way they invest, according to our study from the fourth quarter of 2011. How have the investment criteria of high net worth investors shifted over the past two years?
High net worth investors seem to be making diversification a higher investment priority. Two years ago, in a wealth study conducted at the end of 2010, high net worth investors ranked tax consequences as their top investment criteria (87 percent), second only to the level of risk associated with an investment (88 percent). Diversification ranked third and was a key investment selection factor for 85 percent of high net worth investors. (Correlation coefficients can help investors determine whether their portfolios are adequately diversified.)
Fast forward to the first quarter of this year, and 91 percent of high net worth investors rank diversification as a key criteria, second only to risk (95 percent). Tax implications ranked third (86 percent). Diversification – a strategy that prevents investors from putting “all their eggs in one basket” - dilutes investment risk by spreading risk over a variety of investment products that perform inversely to each other. (Alternative mutual funds can provide a tool for diversification.)