Affluent Investor Outlook – Faith in the Market, But Fear in the Portfolio

Affluent Investor Outlook – Faith in the Market, But Fear in the Portfolio

Heat Check – How the Affluent Feel About 2018 via Personal Capital

Even for those who seem to have everything, the future is still uncertain.

This is according to a Personal Capital survey of America’s affluent (defined as those who have total investable assets of $500,000 or more) on how they are thinking about and preparing their financial futures.

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With one of the longest bull markets in history now almost a decade old, many affluent investors are wondering what comes next. Will the market continue on its upward trajectory or will it finally come crashing down? What’s the best way to structure an investment portfolio to protect against the uncertainty ahead? How will tax policy and the 2018 midterm elections impact investment opportunities?

The answers to these questions varied widely among the mass affluent, with significant differences across generational, income and geographic lines. For example, what’s top of mind for a Millennial with young children that will one day require expensive college tuitions is likely very different from what is most important for a Baby Boomer that has an empty nest and a 401(k) that has been building for four decades.

To explore these differences, Personal Capital commissioned a survey in conjunction with ORC International of 1,000 affluent Americans, asking them everything from how they feel about tax reform to what concerns they have about financial planning.

THE BOTTOM LINE: Although the mass affluent are optimistic that markets will continue to climb in 2018, many are nervous that they aren’t prepared for a potential market downturn or other financial challenges, and they are divided on the impact that Trump and tax reform will have on their finances.

Faith in the Market, But Fear in the Portfolio

Affluent investors are optimistic about the direction of the market, with nearly half (48%) believing the market will perform better in 2018 than it did in 2017, and nearly one-third (31%) saying it will perform well next year but not as well as in 2017. Only 9% think the market will decline in 2018.

Millennials, many of whom have never invested during a bear market, are especially optimistic, with 67% predicting 2018 will be an even better year than 2017, versus 53% of Gen X, 32% of Baby Boomers and 32% of Silent Generation.

But this enthusiasm is tempered when you look at investors’ portfolios.

A shocking 16% of affluent investors—and 25% of Millennials—have most of their net worth invested in cash, a frightening proposition given today’s low interest rates. If inflation rises and interest rates remain low, then holding cash in a simple savings account would, in effect, be like manufacturing your own market downturn. While there are many valid reasons to keep cash on hand even during a bull market (saving up to build an emergency fund or buy a home), the data suggests that many people may be missing valuable investment opportunities by not being diversified.

Sixty percent of people—and 87% of Millennials—say they made a financial mistake in 2017, such as not saving enough for retirement, paying too much for luxury items and not having a portfolio that can withstand a market downturn.

The good news is that mistakes can be fixed.

While no one can predict where the markets will go, recency bias makes it easy to forget that markets are cyclical and that we will eventually see a downturn. A lack of diversification can be like a ticking time bomb in investors’ portfolios. The key to protecting against such a scenario is careful and smart financial planning.

What’s Keeping the Affluent Up at Night?

The financial lives of the mass affluent are filled with worries, with retirement planning, tax planning and long term portfolio health among the three top things the affluent are losing sleep over.

Affluent Investor Outlook

Affluent Investor Outlook

Honesty is a key part of financial success, and acknowledging a pain point can be the first step in fixing a financial problem. 60% of respondents were willing to admit to making at least one financial mistake in 2017, with 87% of Millennials being especially forthcoming about their faults (vs. 66% of Gen X, 40% of Baby Boomers and 30% of Silent Generation).

Affluent Investor Outlook

Affluent Investor Outlook

Meanwhile, the affluent already have their sights set on 2018, with tax optimization and retirement planning coming up as their two biggest financial goals. With Congress expected to pass sweeping tax reforms that will affect 2018 tax returns, tax planning is expected to stay top of mind for many investors.

Affluent Investor Outlook

The Trump Effect

The affluent were likely among those most tuned in to the national debate over tax reform. But just like other Americans, wealthy individuals all over the country are divided over everything from what’s an appropriate tax rate to whether Trump’s policies are a net positive for their investment portfolios. While everyone’s exact tax rate will depend on their state of residence and how they generate income, the overall plan is expected to be a net positive for the mass affluent.

But many of our survey respondents indicated they think people making more than $1 million should pay higher taxes, with wealthier and younger respondents more likely to be in favor of a higher tax bracket. We saw geographic differences too, with GOP strongholds in the Midwest and South more likely to favor lower taxes for wealthy individuals compared to the relatively Democratic-friendly regions in the Northeast and West.

All eyes are on the 2018 midterm elections. However, whether a Democrat or Republican-controlled Congress is best for the finances of the mass affluent is a matter of fierce debate.

The mass affluent are just as divided as members of Congress when it comes to deciding what’s an appropriate tax rate for a wealthy individual or family. While the majority seemed in favor of a tax rate between 21-40%, there were significant differences across income, geographic and generational lines.

When asked, “What’s an appropriate federal income tax bracket for someone making more than $1 million per year?” Affluent Americans answer differently by income, region, generation, and gender. (See tables following)

Affluent Investor Outlook

Affluent Investor Outlook

Article by Personal Capital

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