Don’t panic: Despite volatility, wealthy investors plan no money moves, CNBC survey says

It’s hard to avoid the allure of panicky headlines when the Dow is below 23,000 and the Nasdaq has entered a bear market, but for every “record” stampede of investors into bonds and sudden flood of money into cash tracked by a Wall Street firm, there’s a wealthy American making a money move that might seem even more shocking: not doing anything.

No one can afford to be complacent. The right investment portfolio, the one you can live with, isn't necessarily the same as the one that is currently generating what seems to be endless returns.

Joshua Lott | Getty Images
No one can afford to be complacent. The right investment portfolio, the one you can live with, isn’t necessarily the same as the one that is currently generating what seems to be endless returns.

The latest CNBC Millionaire Survey shows that even as volatility spiked in the period since September, wealthy Americans are not making major changes to asset-allocation models. Investors with at least $1 million in investable assets surveyed by CNBC in mid-November — when volatility was already high — said they expected to keep their allocations to cash, bonds and equities similar over the next 12 months.

The results are consistent with the previous two bi-annual CNBC Millionaire Surveys (November 2017 and May 2018) and with the longer-term asset allocation decision-making of these investors since CNBC began surveying them four years ago.

Wealthy investors surveyed have tended to maintain exposure to U.S. equities of between 45 percent and 50 percent, while keeping 15 percent to 20 percent in bonds, and 12 percent to 16 percent in cash and other short-term investments. When their international exposure is added, the portfolios look similar to the classic 60/40 investment plan (60 percent equities/40 percent bonds).

It shouldn’t be a surprise. Investors who have constructed a diversified investment plan based on their financial situation and risk tolerance are not going to “run for cover” when the market doesn’t go in their direction — no matter what a former Federal Reserve chair like Alan Greenspan says. And while recent outflows from actively managed mutual funds have been large, exchange-traded funds have actually been taking in new money and looking at another year of massive inflows, more than $200 billion for equity ETFs and over $300 billion in all — no matter what a market guru like Jeff Gundlach says about staying away from index funds.

Michael Tucci, CEO of Lexington Wealth Management, which manages roughly $1 billion and has an average client portfolio of $2.5 million to $3 million, said there are always going to be times to choose between leaning into the market, or being neutral or leaning out. For his clients, it was a year-and-a-half ago when they decided to lean out “a little bit” based on valuations in the U.S. stock market, but not fears of a systematic contagion. “Stocks were really expensive,” Tucci said.

That means thinking of moving a 60 percent equities and 40 percent bonds portfolios to 50-50 or 40-60, but not trying to make extreme moves which are more likely to be wrong. Long-term research shows that investors who do make major moves in response to market volatility are lucky if they generate a long-term return that is equal to the rate of inflation. “They sit in cash too long, pull out when market goes down and get way too conservative, and think it is a head fake when the market goes back up. … If you’re going to make changes, make small moves around the 60-40 portfolio,” Tucci said.

No two investors are alike, but the investment process is similar

There are important caveats to the millionaire data. To start with, each investor has a unique financial situation, and many investors do not already have $1 million or more in an investment account. There are some 70 year-olds who maintain what seems like a high exposure to equities (50 percent) but these individuals may still be working and receiving a significant income, or they may simple not need any of their market money to live on.

“We have some 80-year-olds who are near 100 percent equities because they are investing for the next two generations,” Tucci said. “They have more money than they can ever spend.”

The advisor said there are a few straightforward questions that will do an investor more good than the latest calls from the market pundits.

  1. How much do you have in cash?
  2. What dividends and interest is your portfolio generating?
  3. How much do you currently have allocated to fixed-income?
  4. When you add up all of that, how many years worth of money do you have to live?

“Should you really care about equities being down X percent?” Tucci said. “Over rolling five-year periods, there aren’t many when equities are down by much.