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Americans Reluctant to Invest in Equities: Franklin Templeton

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Despite strong U.S. equity market returns in early 2012 that sent the Dow back above 13,000 by the end of February, indications are that many Americans remain investment spectators, reluctant to participate in the equity market rally, a Franklin Templeton global poll has found.

Dan Ariely, economics professor, Duke UniversityThe survey, the Franklin Templeton Global Investor Sentiment Survey, conducted earlier this year, polled more than 20,000 individuals in 19 countries. It was designed by the Duke University psychology and behavioral economics professor Dan Ariely (left), and examines what factors are influencing investors’ outlooks and behavior.

U.S. respondents’ perceptions of the economic landscape, both for the U.S. and globally, skewed toward the negative. Half of U.S. respondents believe the U.S. economy has deteriorated since last year, in spite of the fact that the Dow Jones Industrial Average had positive returns in 2011, as well as in 2010 and 2009.

Such negative perceptions were even more pronounced when Americans looked globally, with 54% indicating a belief that the global economy deteriorated in 2011. U.S. respondents’ perceptions of the global economy were in line with those of global respondents, 51% of whom believe the global economy deteriorated last year, but more negative than countries like India and Brazil, for example, where just 12% and 34% of survey participants, respectively, held this negative view.

Investor skepticism appears to be tied to the extreme volatility witnessed in 2011, in which the Dow Jones Industrial Average had 104 days of triple-digit swings-representing a significant portion of the 252 total trading days last year. Indeed, when asked about the importance of various market scenarios when deciding to purchase an equity investment, market stability was most frequently identified by U.S. respondents as an important factor.

“The market volatility that has persisted since 2008 is keeping many investors on the sidelines, and their ability to view positive equity market performance constructively has been thwarted by the market ups and downs that are at odds with the stability they are seeking,” John Greer, executive vice president of corporate marketing and advertising at Franklin Templeton Investments, said in a statement. “But the reality is that investors who have been waiting for ‘the right time’ to get back into the equity market have been missing out on the market rally we’ve witnessed over the past few years.” Near-term pessimism appears to be leading many Americans to keep their investments close to home for the immediate future. When given the choice to invest in only one region next year, 82% selected the U.S. or a combination of the U.S. and Canada, while Asia and Europe, for instance, were chosen about 10% and 4% of the time, respectively. Home country bias among U.S. respondents was stronger than among global respondents, 56% of whom would select their own country in this scenario.

Home country bias may be generated by two main factors. “The first is an overly optimistic belief about one’s own economy,” Ariely said. “The survey shows us that respondents in almost every country had an expectation of performance in their country that is higher than what would be statistically realistic. The second reason is most likely due to procedural difficulties in investing outside the country—such as less knowledge about how to access these markets, not having recommendations for such products and of course having fewer products available.”

While U.S. respondents are largely country-centric in their current investment strategies, they did, however, indicate a desire to modestly increase their investments outside their local market over the next 10 years. A majority (75%) of U.S. respondents currently have a limited portion (20% or less) of their portfolios invested outside the U.S. When asked to look out 10 years, however, 37% of investors anticipate holding more than a fifth (21% or more) and 23% anticipate having more than two-fifths (41% or more) of their portfolios invested outside the U.S.

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