Investor confidence is at a 16-year high. That’s the result from a recently conducted poll by a Gallup in association with Wells Fargo.
When are investors confident, typically when the market is setting new highs. We are in the eighth year of an extended bull market. Consequently, it should not come as a surprise to learn that this poll, of a little more than 1,000 investors, was conducted soon after the Dow Industrials Average crossed over the 20,000 level.
Investor confidence is at a 16-year high
The current investor confidence level from this poll, conducted during February, 2017, was +126. That’s a 30 point increase since the last time the poll was conducted; three months earlier in November, 2016. As you can see from the chart above, investor confidence frequently mimics the current stock market performance. Back in 2008, during the financial crisis, in a year when the S&P 500 lost 37 percent, investor confidence was well below -60.
Investors are frequently wrong
The last time investor confidence was this high was back in 2000, during the dot com mayhem, when the confidence level was +130. Investor confidence should be not thought of as an indicator of future stock market results. No one has a crystal ball, nor can they predict the future direction of the stock market. If anything, the fact that the investor confidence was as low as it was back in 2008 shows how investors are frequently wrong.
Be greedy when others are fearful, and fearful when others are greedy. – Warren Buffett
Warren Buffett has been quoted as saying, “be greedy when others are fearful, and fearful when others are greedy.” While the stock market prices were falling and many investors – especially smaller retail investors – were selling and putting their money into cash, smarter, savvier investors were buying. Since then, the market has regained all of its declines more than twice over. It’s common for people to react incorrectly, selling when the market drops.
Rising interest rates: some happy, others not
Recently, the Federal Reserve raised interest rates. Those surveyed in the poll had mixed responses, those older than 65 were happy to see rising interest rates, and those under 65 were less than thrilled.
The difference in the responses between young and old is not surprising. For those people who are already retired, a rise in interest rates signals a likelihood of higher interest rates which will allow them to transfer more money from stocks to bonds. Older, retired people are usually looking for fixed, predictable rates of return on their investments.
10-year bond: 2.60 percent
It’s understandable. On June 1, 2012, the 10-year Treasury rate fell to its lowest point since the early 1800’s. It hit an intra-day low of 1.442 percent. Less than 1.5 percent; that’s not a very exciting return. Certainly not something that’s going to help retirees. By the end of 2016, the 10-year climbed to a still-modest 2.60 percent. Rates haven’t moved much since then; in fact they’re a little bit lower.
It absolutely baffles me who buys a 30-year bond. – Warren Buffett
Warren Buffett recently told CNBC that he can’t see any reason for investors to buy 30-year bonds right now. “It absolutely baffles me who buys a 30-year bond,” said the chairman and CEO of Berkshire Hathaway. Today, with the 10-year and 30-year U.S. Treasuries paying just 2.46 percent and 3.06 percent, respectively, you can understand why Buffett isn’t interested and why retirees are likely going to haven’t to look elsewhere in order to find reasonable returns on their investments. Regardless, seeing rising interest rates is likely to make some retirees a bit more optimistic about the possibility of reasonable interest rates in the future.
Conversely, younger people – those who are still working – were less enthusiastic about rising interest rates, not only because rising interest rates could result in lower returns from stock market investments, but also due to real estate concerns. Those working aged adults who are looking to either buy or refinance real estate will be forced to pay more for their mortgages due to those higher interest rates.
The future is bright
The confidence that investors are feeling has translated into a greater sense of confidence about the future as well. Yesterday, I wrote about retirement planning. Overall, 40 percent of the general population feels that they are ill prepared for their retirement. Further, of those 60 percent who believe that they are on track for a reasonable retirement, many it turns out are likely in for a shock when they retire are don’t have enough money to continue their current lifestyles. While that might be the case for the general population – that poll was far more of a broad swatch of the American society – things are different for the investing population.
78% of investors are confident about their retirement
Those 1,000 or so investors polled in the Wells Fargo/Gallup Poll suggested that they were optimistic about their future. More than three out of every four investors – 78 percent – up from 69 percent in the prior measurement back in 2014, are feeling confident they will have enough money to maintain the lifestyle they want throughout their retirement. The overwhelming exuberance is likely attributable to the extended bull market. Since the market’s nadir back in March 2009, prices have climbed roughly 270 percent.
While I’m not looking to rain on these investors’ sense of confidence, their optimism is very likely tied to the recent performance of the stock market. Today after an eight-year run up of almost 270 percent, investors are thinking rainbows and lollipops. Likely those same investors were understandably singing a very different song back in 2008 when investor confidence was low. Back then, investors, especially retirees or those close to retirement, saw the value of their portfolios cut by a third or more. Many were probably wondering how they were going to make ends meet; whether they would have to go back to work to help support their lifestyles. When times are good, people are optimistic. When times are bad, not so much.
The long haul
Regardless of the results of this poll, and investors’ confidence levels, I believe it’s best for most investors to simply stay the course. Investing is a long-term proposition. Near-term price gyrations, news stories, or changes in interest rates should have much of an impact on your investments.
Most of us should be investing our money in broad-based index funds, be they mutual funds or ETFs. Invest as much as you can, as often as you can. Ideally you would invest at least 15 percent of your salary. The more you invest, the better off you will likely be in the future. The earlier you start investing, the more time your money will have to compound and grow.
A $6,000 annual investment — that’s $500 a month — earning 7 percent a year will make you a millionaire in about 37 years. If your investments were to return just 8 percent a year, you would have almost $1.7 million after 40 years.
Image credit: Pierre