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Retirement Planning > Retirement Investing

Investor Sentiment Perks Up in Fourth Quarter: Wells Fargo

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Investors are feeling better about the future of the economy and jobs, Wells Fargo reported this week.

The Wells Fargo/Gallup Investor and Retirement Optimism Index rose 24 points to 42 in the fourth quarter, nearly twice the gain recorded in the third quarter, but still far below the 20-year high of 138 the index reached in the January-to-March period.

Forty-eight percent of investors said they were very or somewhat optimistic about the 12-month outlook for the economy, up from 40% last quarter. Optimism about the potential for a decrease in unemployment rose seven percentage points to 40%.

Optimism levels for the stock market and inflation remained about the same as in the third quarter, at 47% and 19%.

“Investors were absorbing a number of significant developments in the economy, politics and the pandemic at the time of this survey,” Michael Liersch, head of advice and planning for Wells Fargo’s wealth and investment management division, said in a statement.

“These ranged from a new surge in COVID-19 infections and the October jobs report, to the Nov. 3 elections and the very first announcements about the high effectiveness of certain COVID-19 vaccines.”

The index results were based on an online survey conducted Nov. 9 to Nov. 15, using the Gallup Panel, among 1,709 U.S. adults who have $10,000 or more invested in stocks or bonds, either individually or as part of a retirement or mutual fund. The fourth quarter poll included an oversample of 603 higher-income investors, defined as having $240,000 or more in household income.

Proceeding With Caution

Wells Fargo noted that the fourth-quarter poll was conducted before the Dow Jones Industrial Average cracked the 30,000 barrier in late November.

In the survey, 65% of participants said they were very or somewhat confident that the stock market is a good way to build wealth for retirement — a similar to the 69% who expressed this sentiment in both the 2020 and 2019 second quarters.

Similarly, 67% in the new survey reported feeling either neutral or optimistic about investing, rather than fearful of a market downturn.

Still, “the uncertainty and market volatility created by the pandemic may be causing some investors to continue to proceed with more caution than usual,” Liersch said.

Although 69% of respondents said they have made no change to their cash versus investment allocations, 25% reported that they have kept a greater proportion of their money in cash since the start of the pandemic, significantly outnumbering the 6% who said they have invested a greater proportion in the markets.

Even with this, 32% of investors felt they had too little cash on hand, compared with just 7% who said they had too much.

“Liquidity affords people a sense of short-term control, while long term, they may recognize that they should either be investing or staying the course in the markets,” Liersch said.

“This dynamic can create a bit of inner-conflict when making financial decisions for one’s ‘present’ versus ‘future’ self. People wonder: Which one should I prioritize during times of uncertainty?”

Recognition of what is in versus out of their control is infused in much of investors’ financial lives, Wells Fargo said.

Asked how much control they felt they had over various aspects of their financial security, 62% report feeling they had a lot of control over being able to reduce or stay out of debt.

This sentiment plummeted to 30% in terms of saving for a comfortable retirement, 24% for generating the income they need to support their standard of living, 11% for preventing major investment losses and to just 3% for producing major investment gains.

Higher-income investors in the oversample were likelier than investors overall to feel they had a lot of control over their income, saving for retirement and staying out of debt. However, they were similar to all investors in feeling they have control over avoiding big market losses or achieving big market gains.

Related: Most Advisors Steered Clients Away From Selling at Market’s Bottom: Survey

Whereas 67% of higher-income respondents said that having a large amount invested in the markets made them feel more confident about their financial security, versus 37% of all investors, most investors surveyed said that having a large amount of money in cash made them feel more confident.

“While investors of all levels of affluence tend to agree that cash is a tool that provides confidence, they tend to differ in their views of investing as a productive tool for their financial future,” Liersch said.

“The question we should ask ourselves is ‘Why?’ These different investor perceptions can drive decision-making and ultimately financial health and outcomes.”

Higher-income investors surveyed were also more risk tolerant than investors as a whole, with 64% expressing willingness to take a lot or a fair amount of financial risk, versus 49% of all investors. Twenty percent said they were currently taking a good deal of risk, versus just 5% of all investors.

The Election and Confirmation Bias

The 2020 elections also could affect how people look at their plan, Wells Fargo said. Forty-six percent of investors surveyed said the election results made them feel more optimistic about the U.S. economy over the next 12 months, but 42% said it made them less optimistic.

Related: Investors and Business Owners Feeling Good After Election: UBS

The remaining 12% said the elections had not affected their economic outlook.

Wells Fargo noted that this nearly split decision on the impact of the elections contrasts with a slightly more positive balance of opinion after the 2016 elections, when 46% of investors felt more optimistic and 38% less optimistic.

Today’s reactions are more positive, however, than after the 2012 elections when 40% felt more optimistic and 48% less optimistic at that time.

Eighty-one percent of Democrats in the survey felt more optimistic about the economy in the wake of President-elect Joe Biden’s victory, and 59% though it would have a positive effect on their net worth.

By contrast, 90% of Republicans felt less optimistic about the economy, and 77% foresaw a negative effect on their net worth. These figures represent a reversal of the partisan reaction recorded after the 2016 elections, Wells Fargo said.

Liersch said this was a result of “confirmation bias,” a tendency to seek out information confirming one’s point of view; in this case, whether that is supported by the winning or losing candidate. Investors who can move beyond that bias tend to be more open-minded and flexible with their investments.

“If we are willing to update our beliefs and assumptions, we can update our plans, too,” he said. “This is where working with other trusted people can help keep you on your toes, especially if they serve to challenge your beliefs no matter what they are.”

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