As we begin the new year, affluent investors are looking back at nearly two years worth of bad news and wondering what 2002 has in store for them. They are asking themselves questions such as "When will the recession end?" "How long will the war against terrorism last?" "When will the market rebound?" And, "Will there be a return to the booming returns of the late 1990s?"

To see how they were feeling and what they were thinking, we recently conducted a survey of 417 affluent investors who had at least $1 million in investable assets. Along with almost every other American with money in the stock market, they had seen the values of their portfolios steadily decline since early 2000 ( estimates that the average American's net worth has declined 14% over the last year). Yet despite the long downturn and the climate of uncertainty, we found that as a group, affluent investors were nervous but not panicky about the economy's short-term prospects and optimistic if not quite exuberant about where the stock market would be by the end of 2002.

Here are some highlights of our survey:

67.4% believed the federal government was doing the right thing to shore up the economy.

Over the long term, 71.2% still thought the stock market was the best place to invest.

74.3% thought the value of their portfolio would go up over the next year.

90.2% believed that working with an advisor was better than making investment decisions for themselves.

A Steady Diet Of Bad News

A lot has happened since the three major indexes peaked in early 2000 and, from the standpoint of America's investors, very little of it has been positive. The triggering event, of course, was the collapse of the dotcoms and the subsequent fall of the Nasdaq. In its wake, there was a steady stream of poor corporate-earnings reports that eventually dragged down the Dow, and the S&P 500 as well. There also was rising unemployment and talk of a recession. Along the way, shareholders in equity mutual funds have been clobbered and hard put to find a haven for their investments. Then came the tragedy of September 11, the aftershocks of which are still being felt. And throughout the nearly two-year-long downturn, investors trying to make sense of it all have had to wade through a welter of statistics-leading economic indicators, consumer confidence, productivity, housing starts-which seemed to befuddle the experts, let alone the amateurs.

By December, there was some positive news at last, despite the unexpected collapse of Enron. Buoyed by the Fed's repeated rate cuts and the prospect of a government stimulus package of up to $100 billion, investors helped push the Dow back over 10,000 and the Nasdaq beyond 2000, nowhere near their highs of 2000, but still welcome milestones given the course of 2001. The minirebound seemed to confirm that the worst was over.

Even the fact that that the National Bureau for Economic Research declared in late November that a recession had begun in March of this year seemed to be something of a relief because usually by the time a recession officially is declared, it was well on its way to being over. In fact, the average length of the nine recessions since World War II is 11 months, which would mean this one will be over in February. The two worst recessions during that time lasted 16 months, which would mean a turnaround by the summer of 2002 at the latest. In any case, most economists and financial services firms already have pushed back the date of the recovery from the first quarter of 2002 to midyear, though there is little consensus as to how robust the rebound will be.

The strength and timing of the recovery probably will hinge on consumer confidence and, in turn, consumer spending, which kept the economy out of a far deeper trough in 2000 and 2001. And there is still plenty of mixed news for investors to digest. There is, for example, the uncertainty of war and the specter of future terrorist attacks. And though there certainly will be an economic-stimulus package, no one knows what form it will take, with the Republicans favoring tax breaks and the Democrats pushing unemployment benefits and health insurance. In yet another example of good/bad news, an all-time record for the sale of cars and trucks was set in October, but the fact that the sales were spurred by deep discounts and zero-percent financing left economists nervous about the impact down the road.

The State Of The Market

If our 417 affluent investors are any indication, however, overall consumer confidence is on the upswing. In what is clearly positive news for both financial advisors and the economy, affluent investors hadn't turned against the stock market, despite the roller-coaster ride they've been on. Indeed, though 93.8% said that they were scared by their recent stock market experience, and only 2.4% thought that the stock market had hit bottom, they were surprisingly, and almost paradoxically, positive. Overall, 65% said that they had faith in the stock market, and 71.2% felt it was still the best place to invest for the long term. When it came to volatility, 74.3% thought that while the market would be volatile in the short term, it would get better.

The State Of The Nation

Looking at the nation as a whole, affluent investors again were upbeat, with 67.4% thinking the federal government was doing the right things to shore up the economy. An even higher percentage-73.4%-were confident in what Alan Greenspan and the Federal Reserve Board were doing. There were, however, some fears that were directly related to the events of September 11. For instance, 28.8% thought that there would be more terrorist attacks that would hurt the market, and 31.4% thought that, as a result of the lingering economic impact of the attack, the tax cut would somehow vanish. Interestingly, only 1.4% thought that buying stock was patriotic, and just 2.6% thought that a military attack by the United States would lift the stock market. (Since our survey, the United States began its war on Afghanistan, and the market has rebounded somewhat.)

The Affluent And The Stock Market

Similarly, there was mostly positive news about what the affluent would be doing with their money. Only a handful, 6.5%, were thinking about pulling most of their money out of the market, and even fewer, 4.8%, were going to convert their investments to cash. On the up side, 74.3% believed that the values of their portfolios would go up over the next year. And, in a sign of new restraint, only 1.4% said they would not be borrowing to buy stocks, perhaps helping to curb some of the excessive margin investing that contributed to the stock market spiral.

In a response that was heartening for the financial services world, investors seemed to have accepted the fact that the boom truly was over, with 89.4% saying that they didn't expect double-digit growth for several years. Couple that finding with the fact that they still had long-term faith in the market, and investors may not be chasing returns-and changing financial advisors-at anywhere near the pace of the late 1990s.

There was other good news for financial advisors, particularly those who kept in close contact with their clients. In a strong endorsement of the advisory business, 90.2% felt that working with an advisor was better than making investment decisions on their own. At the same time, a very substantial 70.3% felt that they needed to reallocate their investments, which adds up to an important opportunity for client interaction.

As for online investing, there continued to be a backlash, with 69.8% saying they would decrease the amount of trading they did online and only 5.3% saying they were going to set up a new online account. As was the case in other research that we have conducted recently, wealthier investors were increasingly looking to the Internet for information and advice, not trading, which they want to leave in the hands of their advisors.

Affluent Actions Beyond The Market

There also were some interesting findings when it came to financial actions beyond the stock market. In responses that, again, were best seen in the light of the events of September 11, 33.1% said that they were going to update their wills, and 29.7% were going to buy more life insurance. Because of the attacks, 31.9% said they had changed the way they thought about charitable giving, and 19.6% said they were less concerned about the tax benefits of charitable giving than they had been.

Given some of the other evidence suggesting greater fiscal restraint on the part of investors in the last year or so, it was surprising to find that only 10.1% of our respondents said they planned to put money away in a bank account, making it a safe bet that Americans will continue to be ranked high among the world's worst savers. Along the same lines, only 1.4% planned to pay down their debt, and despite applauding the Fed's actions, only 5.3% said they planned to refinance their homes. In what could be a bad omen for the recovery, 67.4% said they were reconsidering major purchases such as a house or car.

In conclusion, as they look to 2002, affluent investors are not abandoning the market, despite their losses of the last two years. At the same time, in what will most likely turn out to be a plus for financial advisors, they are curbing their expectations. Finally, they want to reallocate their portfolios, and understanding that they shouldn't go it alone, they were once again counting on their financial advisors to guide them.

Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates. (Note: The survey of affluent investors cited in this column was conducted by Prince & Associates in 2001.)