After watching the stock market climb from peak to peak last year, investors are finally starting to warm up to equities.
More than 85% of investors are feeling optimistic about the investment landscape, and 74% think stocks have the greatest potential of any major asset class, according to a survey of 500 affluent investors released Monday by Legg Mason Global Asset Management. The survey was conducted in December and January.
The survey also shows that investors still hold relatively conservative portfolios, but are increasingly willing to increase exposure to international assets.
“At the time this survey was conducted, investors had experienced in the U.S. a pretty positive stock market,” said Matthew Schiffman, managing director and head of global marketing at Legg Mason Global Asset Management. “Markets are typically forward looking, while investors are typically backward looking.”
While an increased willingness to take on exposure to U.S. equities is healthy, now isn't the time to chase yesterday's gains, advisers said. In the first quarter of 2014, the S&P 500 gained 1.3%. This still qualifies as a bull market, but is a sizable slowdown from the 29.6% rally that the index experienced in 2013. And last week, the S&P 500 dropped 2.6%, its worst weekly performance since 2012.
“Investors who have been exposed to U.S. stocks all through the recession and the bull market should be looking to take money out of overpriced assets and reallocate funds elsewhere,” said Sarah Tims, a partner and senior wealth manager at RMB Capital Management.
Still, it's good to see that investors who sold off in a panic in 2008 are finally getting off of the sidelines, Ms. Tims said. However, in a market that hasn't seen a 10% correction since 2011, investors would be wise to put about 20% of a portfolio into alternative investments, she said, which offer some protection in case of a steep slide in stocks.
Even though investors are feeling more emboldened, many haven't yet turned that into action and are still holding fairly conservative portfolios.
The average respondent put 41% of his or her portfolio into equities, 22% into cash and 21% into fixed income. This conservative equity allocation holds even for investors many years from retirement, with those between the ages of 40 and 54 putting only 43% of their portfolios into stocks.
“This is definitely a little cash heavy,” said Brian Frederick, an adviser at Stillwater Financial Partners. “The only rationale that I can think of is that investors are using that cash as a holding tank until the market slows down and valuations improve.”
One area of the survey where investors seemed to be right on the money is international equities. Respondents plan to increase allocations to these assets to about 14% this year, compared with 11% last year.
“America is already five years out of its recession,” Ms. Tims said. “Europe, meanwhile, has turned the corner more recently. This means that the continent's small and midcap stocks could do very well going forward.”