Investors Optimistic About Equities, But Is It Justified?

U.S. investors are optimistic about equities, but is the euphoria overblown?

According to a survey of 500 affluent U.S. investors conducted by Legg Mason, 74% said “now is a good time to be invested in equities” with 52% saying they are more inclined to use equities to generate investment income.

Compared to investors based elsewhere, that's a pretty strong optimism, Legg Mason said. U.S. investors are second only to Hong Kong investors when it comes to such optimism; 82% of Hong Kong investors believe that “now is a good time to be in the equity markets.”

Rick Vollaro, chief investment strategist at Pinnacle Advisory Group, warns the jubilant sentiment--spurred largely by better U.S. growth rates and strong year to date returns--may be something advisors need to be skeptical about.

"This study shows that investors may be overly optimistic in the short term, but it should be balanced against plenty of signs that investors are just beginning to abandon their risk averse positioning in domestic equities after a long slumber,” he says. “The survey implies short-term complacency which makes sense, but from a long term perspective I think it might actually be a little misleading.  Our current strategies are positioned to ride the equity markets while the liquidity environment is flush,  while acknowledging that this is no time to be overly aggressive at this point in the business cycle.”

According to the study, investors in the U.S. on average have the largest allocations to equities (39%) followed by Canada (35%).

“Income-oriented investors need to consider strategies that are focused on outcomes," Matthew Schiffman, managing director and head of global marketing at Legg Mason Global Asset Management, said in a statement. "Our survey is telling us that income-oriented investors in the U.S. are coming up well short of their goals – almost 3% short – and that number could be significant especially for retired investors who need to live on the income their portfolios generate.”

He continued: “Investors have to recognize the trade-off. If they want higher income, they need to increase their exposure to risk in both fixed income and/or equities; if they prefer a low-risk approach to investing, they may have to reduce their income goals and expectations.”

According to Schiffman, if investors recognize a need to take more risk and are prepared to do so, then they need to consider allocating to different fixed income and equity styles in markets outside of the U.S.

“The key will be to manage portfolio risk through careful portfolio construction and diversification across actively-managed, income-producing global asset classes. A thoughtful approach to taking more risk can help close the income gap that investors say currently exists.”

Legg Mason's survey found that for U.S. investors seeking additional opportunity outside their home countries, they are most likely to look for equity or fixed income opportunities in the United Kingdom and Japan, followed by Europe (excluding United Kingdom), Brazil, China, and other emerging market countries. They are least likely to consider Russia.

The gist of advice to advisors: Have a healthy dose of skepticism, and don't let the equity euphoria in the U.S. blind you from recommending opportunities elsewhere.

For reprint and licensing requests for this article, click here.
Investment insights Investment products
MORE FROM FINANCIAL PLANNING