How the wealthy invest differently at times of high uncertainty

Published 10 August 2020

If you were told in January what equity markets would be like in March, you probably wouldn’t have believed it. If you were told in March that a strong equity market rally in June would almost flip your loss, you probably wouldn’t have believed that, either. When things change so fast that even beginning to make sense of the future becomes challenging, how would investors behave?

The market crash in March triggered loss aversion among many investors. The superannuation industry saw panicked members flocking to cash. In just a month, Sunsuper members moved $1.2 billion into cash, conservative and “capital guaranteed” options. Similarly, UniSuper members moved $1.4 billion from growth investment options to defensive options.

Stay put or make a move

CoreData’s research shows that only a minority of high net worth (HNW) individuals acted to deal with the unprecedented volatility – most (70.8%) mass affluent investors and more than half (56.3%) of HNW investors stayed put, awaiting stronger signals help them fathom what is going on.

But there is a clear divergence of investor behaviour among those who have already taken action. HNW investors are more likely than mass affluent investors to be actively engaged in managing their investment portfolios and to consider a more aggressive strategy amid the wild market volatility.

The lure of the “dip”

Market volatility can be friend or foe. Those who see it as a friend cannot resist the temptation of the dip in the market. Almost three in 10 (28.9%) HNW investors have already bought the dip. Another 28.8% of HNW investors missed out the deepest dip in March but plan to buy the dip in Q3. They either expect a second dip or think that assets are still cheap compared to pre-COVID levels.

The economy still looks gloomy and many investors hold a bearish view about the investment market but our data shows that less than half (47.3%) of HNW investors and less than half (49.2%) of mass affluent investors think the investment market will perform worse in Q3.

It appears that a buy-the-dip mentality is tempting more investors, especially HNW investors, to buy into a bubble inflated by expansionary monetary policies, before a stronger signal triggers another sentiment avalanche.

Cause or result of risk-taking?

The risk appetite of HNW investors varies greatly from that of mass affluent investors. HNW investors are much more likely than the mass affluent investors to seek risk. Do the wealthy get wealthy because they risk more and it pays off, or is it because they can afford to lose more without affecting their lifestyle that they are willing to take on more risk? Both reasons might be right.

Research[1] shows that risk is more attractive to the wealthy than the non-wealthy if the amount of money at risk is small, which is unsurprising since a loss of, say, $1000 is marginal for a wealthy investor with $1 million investment portfolio.

This perhaps partly explains why there are a lot more HNW investors than mass affluent investors who have bought the dip, although not many of both cohorts have changed their portfolio allocation strategy to be more aggressive. It is relatively easy for the wealthy to spare $1000 to test the water. While the loss of such small amounts would not make much difference to their lifestyle, the potential upside, if accumulated consistently, would contribute to a wider gap between the wealthy and the non-wealthy.

The non-wealthy may need to take prudent risk to generate greater returns and reduce reliance on compensation. It is easy to talk about the wisdom of being greedy when the majority is being fearful, but actually having skin in the game is something that most investors are wary of.

All data is sourced from CoreData’s quarterly Investor Sentiment Index Research. HNW investors are defined as having more than $750,000 of net investable assets; mass affluent investors are defined as having net investable assets between $50,000 and $350,000.

[1] Bosch-Domènech, A. & Silvestre, J. “Do the wealthy risk more money? An experimental comparison”

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