Some Investors Ditch Stocks as Interest Rates Boom: Survey

This year’s high inflation and higher returns on safe cash accounts may be spurring many clients to make changes in their regular investment patterns, a new survey suggests.

Either inflation or high cash returns, or both, have prompted more than half of U.S. stock investors this year to either buy or sell shares or withhold money from the equities market, a Bankrate survey released Wednesday found.

Among a sampling of U.S. adults with retirement or investment accounts, surveyed in April, 52% reported they had made these moves, while 49% said they’d done nothing or invested more, according to a Bankrate post on the survey.

Others Investing More

Investors don’t expect to sit on the sidelines, though.

Some 45% expect to invest the same amount this year in stock as they did in 2022, while 27% plan to invest more, with younger people more inclined to augment their investments, according to the survey.

Specifically, Bankrate found that 53% of Gen Z investors ages 18 to 26 and 43% of millennials ages 27 to 42 plan to boost stock investments, compared with only 19% of Gen Xers and 9% of baby boomers.

The two younger generations were far more inclined to make moves in response to inflation and higher interest rates, and both show a higher intent to boost stock investments in 2023, according to the survey.

The survey also found a higher percentage of Americans own stock-related investments this year than in 2022.

“When investors are faced with adverse market conditions, often the best course of action is to do nothing or better yet, invest more,” Bankrate Chief Financial Analyst Greg McBride said.  “Nearly half of investors, 49%, did so, including 54% of Gen X and 57% of baby boomer investors. Gen Z and Millennial investors were much more active in response to inflation and interest rates, buying, selling and withholding additional investment.”

Among other findings:

• Rising interest rates prompted 25% of stock market investors to move money out of stock-related investments or deliberately withhold additional contributions to these investments, since the start of 2023 — outnumbering the 21% who contributed more.
• More than a third intentionally have not taken action due to higher interest rates, and 18% were unaware of the higher returns on safe haven investments.
• Elevated inflation this year caused investors to show a greater tendency (26%) to move money out of, or deliberately withhold additional investment from, stock-related investments than to increase contributions (20%).
•  Nearly half of investors took no action related to high inflation, and 9% reported they were unaware of elevated inflation.

Advisors Respond

Investor willingness to take advantage of these macroeconomic conditions is a positive development, advisors suggested.

“I think it’s good that investors are considering the significant change we’ve seen in interest rates and inflation and how that might impact their investments. The increase in Treasury rates, CDs and high-yield savings accounts may allow people who have a defined need (to) reduce their stock allocation,” Mike Hunsberger, Next Mission Financial Planning owner, told ThinkAdvisor via email.

“The critical factor for me is always the time frame when someone may need their money. If it’s less than three to years, it should be in safe assets. Beyond five years, stocks have historically performed well and can be key to growing your wealth,” Hunsberg said.

Alexis Hongamen, Total Financial Planning founder and president, also noted the importance of current returns for safer financial vehicles.

“I think advisors should be aware of the higher rewards that lower risk investments are now providing in this inflationary period we are experiencing. Possibly recalibrate our exposure to risk, when the returns from safer investments may satisfy our clients’ long term goals,” Hongamen told ThinkAdvisor via email.

“Survey results show a concerningly high amount of people have taken no action to fight inflation, leaving them exposed to a meaningful decline in the purchasing power of their money,” Jeremy Bohne, financial advisor and founder of Paceline Wealth Management, told ThinkAdvisor via email.

“If they haven’t recently taken action, it’s unlikely they did before so they probably aren’t well prepared. What works well in a period of high inflation is very different from what worked well during much of the last decade,” he said.

“Inflation is leading many people to invest cash sitting in their bank accounts, which may be good for those who were not fully invested, but bad if that cash was earmarked for a specific purpose, like an emergency fund or a house down payment,” Bohne continued. “It’s important not to invest cash set aside for an emergency fund, because in the event of a recession, markets are likely to be down when a potential employment gap is most likely.”

(Image: Adobe Stock)