Risk Tolerance Reaches Record Lows

by: Wall Street Daily

Risk Tolerance Reaches Record Lows

by Shelley Goldberg

Don't be fooled by a few up days in the markets last week, because believe it or not, investors' desire to take on risk is at an all-time low, as the words "risk off" are still evident in the financial press.

But it's not just the market bears and doomsayers who are dodging risk. There's statistical proof to back up the sentiment.

And investors have their reasons, too. A boatload of global uncertainty has triggered an equal amount of volatility, which has scared many folks away.

The Truth Is in Numbers

Compiled and published on a monthly basis by ADP and the editors of Financial Planning, the Retirement Advisor Confidence Index (RACI) is a barometer of business conditions for wealth managers.

It's based on a survey of approximately 300 financial advisors and planning professionals throughout the United States. Among the 10 factors that make up the outlook: asset allocations, investment product recommendations, economic and risk factors, taxes and planning fees.

These factors are measured in order to track trends in wealth management.

A RACI reading below 50 indicates deteriorating business conditions, while readings over 50 indicate improving conditions.

The 41-month average is 53.2.

But the latest reading, based on January statistics, was 47.1, down from 48.5 the previous month.

And it gets worse.

The Perceived Risk-Tolerance Level Index dropped close to 7 points, down to 27.9 from 34.8, which is the lowest recorded number since the index's inception. This indicates that the appetite for risk has fallen to a record low.

You can see both indices in the chart below.

Investors Losing Appetite for Risk

A third indicator, total contributions to retirement plans, confirms the negativity present in the markets.

Advisors reported that their clients were abstaining from contributing to retirement plans as seen by the index's retirement contribution benchmark, which recorded a drop of over 4 points to 55.9 from 60.3. This was either because investors don't trust the markets or they actually need cash for expenditures or to pay off debt.

What's Spooking Investors?

The markets have been skittish due to a variety of factors:

  • Federal Reserve monetary policy.
  • The U.S. presidential election.
  • An economic slowdown in China.
  • The lack of confidence in central banks to boost global growth, despite stimulus efforts in Europe, Japan, and China.
  • The possibility of Britain voting to leave the European Union in June - and the potential for other EU nations to follow suit. This could, in turn, lead to a breakup of the eurozone.
  • The collapse in global commodity prices.
  • The constant threat of terrorism and an ongoing civil war in Syria.
  • Nuclear threats from North Korea and Iran.

What to Do

First of all, try to get some clarity on how these factors could affect your portfolio holdings.

If need be, reallocate some of your capital. But don't just throw in the towel and go to cash. After all, a lot of volatility is just noise, and watching every tick in the market will only lead to anxiety and unnecessary trading.

More importantly, don't call your broker in a panic. With many retail clients requiring hand-holding during times of volatility, financial advisors have a greater incentive to raise their minimum requirements and/or their fees out of frustration.

In fact, by digging deeper into the results of the surveys above, one statistic is worthy of noting. Even though total contributions to retirement plans fell, as indicated above, clients' allocations to equities stayed relatively flat, falling just 0.1, to 48.3, as seen below, meaning many investors are holding on and waiting.

Many Investors Exercising Patience

And just remember: It often pays to do the opposite of everyone else!

Perhaps now is the time to get in on some of those more depressed assets that you were skeptical of -- such as energy, commodities, emerging markets and European debt, among others.

In little time the words "risk on" may dominate the financial pages once again.

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