ST. LOUIS, MO. A majority of investors have taken advantage of low interest rates, according to the third quarter Wells Fargo/Gallup Investor and Retirement Optimism Index survey. The survey of 1,006 U.S. investors was conducted August 7-16; the median age of the retired investors is 70 and the non-retired is 45.
Six in 10 investors (58%) are benefiting from lower rates either by taking out a car loan (30%), refinancing an existing mortgage or home finance loan (17%), taking out a mortgage for a new home (16%), obtaining a student loan for themselves or a family member (9%), or taking out another type of loan (10%) over the past two years. Half of investors say they are very or somewhat likely to take out a loan in the near future in anticipation that rates may go up.
“Investors found a variety of ways to benefit from the low interest rate environment, but this may be a good time for them to revisit their investment strategies and make sure they’re properly diversified to benefit in a rising rate environment as well,” Bob Vorlop, Head of Products and Advice at Wells Fargo Advisors said. “Those nearing retirement and retirees may be able to take some risk off the table in their portfolios.”
Interestingly, forty-four percent of investors say they would make major adjustments to their investment strategy if interest rates rise. The most common action investors anticipate making is buying more stocks (30%), while just 8% say they would reduce their stock holdings. About a quarter (23%) say they would buy bonds or other fixed income investments, whereas 10% say they would sell these types of instruments.
“In a complex market environment, interest rates changes are yet another factor that can be unsettling to investors, but one of the most important roles a financial advisor can play is to design portfolios that can meet investors’ objectives under a variety of circumstances,” Vorlop said. “That can be a tremendous source of comfort and confidence to investors,” he added.
Investor Optimism Index Slips
Even before the steep slide in stocks in late August, the Wells Fargo/Gallup Investor and Retirement Optimism Index showed investor confidence slipping 12 points to +58, from its seven-year high of +70 last quarter. The drop in optimism was attributed to non-retirees, whose index score was down 17 points to +53 versus +70 in May. This was driven more by mounting concerns about the economy – particularly the stock market and inflation – rather than their ability to reach personal financial goals. Retiree optimism held steady at +70, similar to +67 in May.
“While investors couldn’t have predicted the timing of the market volatility, the wide market swings in late August underscored the importance of having a diversified portfolio that helps to shield them from the rollercoaster rides that can occur in the stock market from time to time,” added Vorlop.
Investors Caught Off Guard by August Stock Market Correction
Prior to last month’s market volatility, investors weighed in on their outlook for the stock market. Overall, investors felt the market would either continue to go up (30%) or hold steady (41%); only 26% expected it to start going down. Additionally, more than half of investors, (53%) said it was a good time to invest in the stock market and 41% of this group said their main reason for believing this is that they expected the market to continue to rise. On the flip side, 41% of investors thought it was a bad time to invest, with the majority citing market volatility.
When investors were asked about specific issues that could affect the investment climate in the U.S., the issues most likely to be seen as very harmful were taxes (46%), unemployment (43%), and the threat of cyberattacks (42%). Only 20% of investors in August believed China’s economic slowdown was hurting the investment climate a lot while 42% said it was hurting it a little.
Written Financial Plans Include Debt Management
The survey underscores the important role that a written financial plan can play in helping investors meet their financial goals. Just over a third of non-retired investors (36%) say they have a written financial plan, and of these 45% are highly confident that their plan is adequately designed to ensure they reach their financial goals. Slightly more retired investors have a written plan (45%), and a somewhat higher share, (53%) are highly confident it is adequately designed to achieve their financial goals.
More than half of non-retired investors with a written plan (56%) and 44% of retired investors with a written plan say their plan includes debt management.
“To be truly comprehensive, a plan should take into account essential elements that can help investors reach their financial goals, including both investment and debt strategies. Putting that plan in writing with the help of a professional financial advisor can often be the catalyst to important changes investors can make in pursuit of a brighter financial future,” Vorlop said.
Investors Trim Their Debts
Two- thirds of all investors have been consciously reducing their debt. While three-quarters of investors — including 83% of non-retired investors and 54% of retired investors — have some type of debt, most (89%) say they have made some effort to reduce their debt. Among investors who carry debt, nearly half (46%) say the amount of debt they are carrying has decreased in the past two years, while 31% say it has increased and 23%, say their debt load has stayed the same. Among all investors, debts include either a mortgage (53%), a credit card balance that carries over from month to month (37%), a car loan (35%), a student loan (23%) or another outstanding debt or loan (12%).
Seven in 10 investors who say they made an effort to trim debt feel they have been successful in reducing their debt as much as they had hoped. However, 62% say they intend to make a major effort in the future to reduce their debt.
Debt-free Retirement?
In the same vein, the slight majority of all investors (56%) say it is critically important for them to be debt-free in retirement. Another 36% say this is important but not critical while 8% say it is not too important or not at all important. The slight majority (55%) also believe it is “very possible” for them to be debt-free in retirement; 37% say it is somewhat possible and 8% not possible.
Despite these indications that investors would prefer to be debt-free, the vast majority – 70% — see debt as necessary and acceptable if used sparingly. Just 13% believe any amount of debt is bad and should be avoided while 14% view debt as valuable tool for leveraging money that should be taken advantage of. While views on this are similar by retirement status, they differ somewhat by asset class with investors with $100,000 or more in assets much more likely than lower asset investors to view debt as a powerful tool, 20% vs. 6%.
Social Security
Non-retired investors are generally doubtful they will receive their full benefit from Social Security when they retire: 52% say it is not too or not at all likely the system will be able to pay them their full benefit. And while another 31% say it is somewhat likely, just 15% believe it is very likely.
As a result, most non-retirees are not counting on their Social Security benefit to be a major source of income when they retire. Fifty-eight percent say it will be a minor income source and 14% not a source at all. Just 26% expect it to be a major income source for them. This contrasts sharply with current retirees, 42% of whom describe their Social Security benefit as a major income source and 37% as a minor source.
About the Wells Fargo/Gallup Investor and Retirement Optimism Index
These findings are part of the Wells Fargo/Gallup Investor and Retirement Optimism Index, which was conducted August 7-16, 2015, by telephone. The Index includes 1,006 investors randomly selected from across the country with a margin of sampling error is +/- four percentage points. For this study, the American investor is defined as an adult in a household with total savings and investments of $10,000 or more. About two in five American households have at least $10,000 in savings and investments. The sample size is comprised of 74% non-retired and 26% retirees. Of total respondents, 45% reported annual income of less than $90,000 and 55% of $90,000 or more. The Wells Fargo/Gallup Investor and Retirement Index is an enhanced version of Gallup’s Index of Investor Optimism that provides its historical data. The median age of the non-retired investor is 45 and the retiree is 70.
The Index had a baseline score of 124 when it was established in October 1996. It peaked at 178 in January 2000, at the height of the dot-com boom, and hit a low of negative 64 in February 2009.
About Wells Fargo(Twitter @WellsFargo)
Wells Fargo & Company (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.7 trillion in assets. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the internet (wellsfargo.com) and mobile banking, and has offices in 36 countries to support customers who conduct business in the global economy. With approximately 266,000 team members, Wells Fargo serves one in three households in the United States. Wells Fargo & Company was ranked No. 30 on Fortune’s 2015 rankings of America’s largest corporations. Wells Fargo’s vision is to satisfy all our customers’ financial needs and help them succeed financially. Wells Fargo perspectives are also available at Wells Fargo Blogs and Wells Fargo Stories.
About Gallup
For more than 70 years, Gallup has been a recognized leader in the measurement and analysis of people’s attitudes, opinions, and behavior. While best known for the Gallup Poll, founded in 1935, Gallup’s current activities consist largely of providing marketing and management research, advisory services and education to the world’s largest corporations and institutions.
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