Data and Research

Investor Optimism Surges, Must Be Proactively Managed

Investors are not good at predicting market corrections big or small—but that doesn’t mean they can’t take concerted action to prepare for tougher times. 

By John Manganaro editors@strategic-i.com | September 28, 2017

A slight majority of U.S. investors, 54%, anticipate a market correction later this year in which the stock market takes back “significant gains,” according to results from the updated Wells Fargo/Gallup Investor and Retirement Optimism Index.

While still a majority, this is down from 62% worried about such a correction in 2013 and 58% in 2014, the previous high points. It should be noted straight away that very few investment advisers, if any at all, would recommend their clients try to predict and game future market moves, either positive or negative. But the result are still informative from a behavioral psychology standpoint.  

Indeed, while the majority sees a market correction in the near term as likely, still most investors are not acting proactively to rebalance or otherwise adjust their portfolios to match their true risk tolerance. Defining risk tolerance in this fashion does not mean making guesses on market moves but instead taking a regulated and disciplined approach to periodically adjusting the portfolio to meet long-term objectives.

“One of the consequences of a protracted bull market is, unfortunately, investor complacency,” warns Heather Hunt-Ruddy, head of client experience and growth at Wells Fargo Advisors. “With a market correction inevitable at some point, it’s important for investors to check their confidence with a comprehensive risk assessment to determine how a market correction could affect their overall investment strategies.”

Again, the emphasis is on improving understanding of risk tolerance rather than trying to time the inevitable correction.  

Important to the results, researchers find that the “financial wound of the recent recession finally appears to be healing for many.” The percentage of investors who say they have not financially recovered from the recession is now 26%, down from 37% in February 2016. Similarly, 43% of investors currently say they know someone besides themselves whose financial situation hasn’t recovered, down from 70% in 2016.

Given all of this, the optimism index stands at a 17-year high, largely due to increased confidence in the stock market. Even though investors aren’t fretting over a possible market correction, 56% say their financial situation would be hurt either a lot (13%) or a moderate amount (43%) by such a downturn. The overall percentage believing they would suffer financially includes 60% of high asset investors—those with $100,000 or more in investments—as well as 48% of lower asset investors. At the same time, investors hedge when asked if they feel prepared for a market correction. Barely a third (32%) strongly agree they are prepared, while another 48% somewhat agree they are prepared. Fully one in five (20%) says they are not prepared.

The research further suggests that many more people engaged with retirement plans could benefit from working directly with investing professionals. Despite their recognition that they are not investing pros, only about half of investors say they are most likely to turn to a professional financial adviser to help them through a market correction. A third would rely on their own knowledge or research, while 13% would turn to a trusted friend or family member and just 1% would rely on financial news commentators.