Wealthy Investors Do Not Invest Despite Recognizing Significant Opportunities

A recent study reveals that the majority of wealthy investors (88 per cent) recognise that there are significant investment opportunities available in the current environment. However, the majority of them (68 per cent) are shying away from investing. They believe that the risk of further price falls is too high. This discrepancy between assessment and action is the main result of a survey of 2,100 investors done worldwide by Barclays Wealth and the Economist Intelligence Unit.

The inertia of wealthy investors is exemplified by the avoidance in making changes to their portfolio. When questioned about allocations to 12 different asset classes, more than half of the respondents said that they would not make any adjustments to each of these asset classes. 53% stated they would only invest in what they know. Plans to increase the level of risk in the next 12 months vary significantly between regions. While about one-third of investors in the UK and United Arab Emirates say that they were expecting to make higher risk investments at the low end, only 16% of the Indian and 13% of the Spanish investors plan to increase risk. Actually 36% in India and 45% of the investors surveyed in Spain plan to decrease risk in the next 12 months.

The results of the report show once more that that wealthy investors make the same fatal mistake time and time again: They switch their financial personality at the most unfortunate point in time. During times of bullish markets they act like long-term investors with aggressive goals and during bearish market they change their personality and become extremely conservative investors. The disastrous fact is that this change happens often enough near the bottom of the market (becoming conservative) or near the top (becoming bullish). A fatal pattern that has diminished the wealth of many investors.

However, it is not only the investors who should be blamed for the lack of seizing the investment opportunities they actually see. In our recent survey on European private banks more than half of the banks recommended an extremely bearish strategy. When the survey was conducted the market had almost bottomed out and the test client had indicated a long-term outlook and medium high-risk tolerance. Many of the surveyed advisors indicated instead that they plan to “time” the market. A common approach that sounds simple, but rarely works.

Investors should take matters into their own hands. Firstly they should determine their investor personality by assessing their investment goals, risk tolerance and ability to cope with uncertainty. Secondly investors should determine along with their wealth adviser if the current portfolio strategy is in line with the goals and risk tolerance that the investor has. The market developments of the last 18 months have been rough on most portfolios. However, eventually this is a part of the traditional cycle of boom and bust. An excessive pessimism after such a painful period is understandable, but investors who wait too long may just buy at the worst time, when the market has reached another high.