American investors are probably holding too much of their assets in cash, but according to a recent study by Legg Mason, a Baltimore-based asset manager, it’s not because they’re nervous about the recent market volatility.
To the contrary, according to the 2016 Legg Mason Global Investment Survey, affluent investors are optimistic about market performance this year.
“The consistently high cash allocation that investors maintain runs counter to their stated optimism, and could hinder their long-term portfolio performance,” said Thomas Hoops, Legg Mason executive vice president. “It could be a remnant of the [2008] financial crisis, but it’s more likely a sign of indecision."
Seventy-four percent of the study’s respondents, U.S. investors with at least $200,000 in net worth, think the Dow Jones Industrial Average will increase in 2016, predicting an average increase of 8 percent.
It makes sense, then, that the respondents are most heavily invested in equities, with an average of 41 percent of their assets allocated to stocks, a ratio that has remained stable in Legg Mason’s study since 2013. Over that period, average allocations to fixed income have decreased from a 2014 peak of 20 percent to a low of 15 percent this year, while allocations to "other" investments have increased from 17 percent in 2013 to 20 percent in 2016.
The survey found that the average allocation to cash is 23 percent in 2016, up minimally from 22 percent in 2015, but down from a high of 25 percent in 2013.
Eighty-five percent of affluent investors, said the recent volatility is “nothing we haven’t seen before.” Almost the same proportion, 82 percent, said that U.S. stocks offer the best investment opportunities anywhere on earth in 2016.
On balance, Americans are resilient to bear markets -- barely. The respondents said on average that a 19 percent decline in equity markets would be enough to compel them to re-evaluate their equity holdings, while a 22 percent decline in equities would cause them to sell their equities.
The survey’s respondents were confident in their portfolio allocation, with 81 percent reporting that they were optimistic about their investments in 2016.
Excluding the U.S., Legg Mason found that investors felt that China would offer the best investment opportunities this year, followed by continental Europe, Japan, the U.K. and Australia.