Low stock market volatility has lulled investors into a false sense of security, say experts, but high net worth investors seem to be avoiding the complacency trap.
The year opened with the best first quarter for the stock market since 1998, according to Liz Ann Sonders, a senior vice president for Charles Schwab& Co. The S&P 500 index returned 12.6 percent for the quarter, but despite these and other gains only a minority of high net worth investors – 41 percent – feel they are in a better financial situation now than they were one year ago.
The market rally has been accompanied by relatively low market volatility, noted Sonders, adding, “Many investors – notably those painfully on the sidelines – have suggested this shows a high level of complacency.”
High net worth investors don’t seem to be buying this argument. Quite the opposite: High net worth investors – those with investable assets of $5 million to $25 million – are expressing elevated levels of concern about the U.S. economy, according to research conducted by Millionaire Corner in the first quarter of 2012.
More than three-fourths – 77 percent – of the high net worth say they are concerned about the prolonged economic downturn, up from the 69 percent who expressed concern about the economy in the first quarter of 2011. This worry combines with a high level of concern over the national debt, political environment and upcoming election to create a more conservative and cautious investor.
More than half – 55 percent – of the high net worth say it’s more important to protect principal than grow investments in the current political environment. A minority – 42 percent – are willing to take on significant investment risk to produce a high yield.
Are high net worth investors wise or just worry warts? The stock market rally has sent optimism surging, pushing the Crowd Sentiment Poll from Ned Davis Research into the “uncomfortable zone,” said Sonders. The Yale Crash Confidence Index, which tracks institutional and individual investors, paints a different picture. Three-fourths of the respondents polled in February said they believed a stock market crash was highly likely – data that validates the conservative stance of most high net worth investors.
The low volatility characterizing the first quarter of the year is not likely to last, according to Seeking Alpha contributor Russ Koesterich, who predicts volatility will rise into the high teens to low 20s in the second quarter.
“Without the sedative of easier monetary policy, markets are likely to be more volatile,“ Koesterich said. “In fact, it’s probably fair to say that the first quarter rally was more a function of continuing, and arguably intensifying, central bank generosity rather than a reflection of fundamentals experiencing a complete turnaround.”
High net worth investors – who are likely to be retired or semi-retired – appear eager to protect their portfolios from the wild market swings predicted by Koeserich.