Uncertain times call for certain measures \u2014 and the world\u2019s millionaires appear to be in lockstep with each other.<\/p>\n
The last year has clearly been tough on investors \u2014 from clock-watchers to high-net-worth individuals \u2014 and the latter have shown a dramatic change in behavior. Falling stock prices, rising interest rates, an uncertain economic outlook and the constant drumbeat of recession have led high-net-worth individuals (HNWI) to change their investing habits: they\u2019re keeping their money in cash and cash equivalents at the highest rate in more than a decade.\u00a0<\/p>\n
The Capgemini Research Institute, a global think tank, tracks the behavior of HNWI around the world, and analyzes the asset allocation from the most conservative individual investor to the most aggressive. In its latest annual report, the number of the world\u2019s HNWI has fallen to 21.7 million in 2022 from 22.5 million in 2021, largely due to a fall in stock prices, the latest report found. (Other sources have higher estimates for the world\u2019s HNWI population.)<\/p>\n
Here\u2019s a breakdown of the numbers: HNWI individuals stored 34% of their wealth in cash and cash equivalents in 2022, up 10 percentage points from 24% during the prior year, according to Capgemini\u2019s annual wealth report, which was released this month. It\u2019s also 20 percentage points lower than the 14% stored in cash and cash equivalents in 2006, a couple of years before the Great Recession. What\u2019s more, cash is expected to remain high \u2014 along with interest rates.<\/p>\n
\u201cWe\u2019ve never seen this before \u2014 banks are sitting on tons of cash, sitting idle, waiting for the right opportunity,\u201d Elias Ghanem, global head of Capgemini Research Institute for financial services, told MarketWatch. \u201cThe amount of money held in cash has never been so high, and the jump year-over-year has never been so high. They\u2019re putting their money into short-term cash allocation, checking accounts, savings accounts, and CDs.\u201d<\/p>\n
These habits appear to be reflected by retail investors who don\u2019t have millions of dollars to invest (or burn). \u201cSome of our clients are hesitant to invest cash in this environment and, more often than I can remember in the last few decades, are asking for T-bill and CD ladders while they wait,\u201d Lorraine Ell, chief executive and senior financial adviser of Better Money Decisions, a financial advisory firm near Albuquerque, N.M.\u00a0<\/p>\n
\u201cWe don\u2019t recommend waiting, but this is a time when clients are requesting to hold off investing in equities, probably a result of high interest rates for holding cash and cash equivalents and uncertainty about interest rates and recession and their impact on markets,\u201d she added. Flows into exchange-traded funds this year have gone into defensive equities and bonds \u2014 and not more aggressive equities, she added.<\/p>\n
Indeed, total ETF flows so far this year suggest \u201cinvestors\u2019 diminished appetite for risk,\u201d a June report by State Street Global Advisors concluded. ETFs took in $44 billion in May, in line with the 5-year average of $44 billion, but below the 3-year average of $54 billion. But only 47% of ETFs had inflows \u2014 15 percentage points below the historical median,\u201d it said. \u201cEquities were 17 percentage points below their historical median (44% versus 61%).\u201d<\/p>\n
The year got off to a promising start with a stock-market rally, but it recently appeared to run out of steam. <\/p>\n
The S&P 500 \u201cWe don\u2019t think the rally is over, but it may be difficult\u201d for that earlier rally to continue in the weeks ahead \u201cwith liquidity coming out of the system,\u201d Michael Arone, managing director of State Street Global Advisors, told MarketWatch in a phone interview earlier this week. So much for FOMO \u2014 \u201cfear of missing out\u201d \u2014 by those investors sitting on the sidelines.<\/p>\n Global stocks reported their worst performance since the 2008 financial crisis with nearly $18 trillion wiped out in 2022, the Capgemini report said. Only 23% of their investible wealth was held in equities, down 6 percentage points from 29% in 2021. Real estate appeared to be another relatively safe haven with a 15% allocation, a percentage that has not changed since 2020. Ditto alternative investments, which hovered at 13% to 14% for the last four years.<\/p>\n \u201cWhen cash was yielding zero, purely from an investment perspective, clients had little incentive to hold cash,\u201d Andrew Schuler, investment managing director at PNC Private Bank, told MarketWatch. \u201cNow, given recession fears and the substantial rise in rates, many clients are more comfortable holding cash yielding around 5% instead of taking risks in the markets.\u201d<\/p>\n But he said that comes with a downside. \u201cWe do tell our clients that the risk you don\u2019t see is the loss of purchasing power,\u201d he added. \u201cWhen inflation is running 4%-5%, your real yield is close to breaking even. This is unlikely to achieve the investment results the clients\u2019 longer-term goals and objectives require.\u201d<\/p>\n \u201cIt doesn\u2019t have to be all-or-nothing decisions,\u201d Schuler said. \u201cSure, you can hold a higher cash reserve, but that doesn\u2019t mean you should be all cash or all invested \u2014 there is a middle ground using higher yields to your advantage as part of your asset allocation. We always recommend that clients maintain sufficient cash to satisfy current lifestyle needs and other known expenses.\u201d<\/p>\n Nearly 70% of HNWI individuals cited \u201cwealth preservation\u201d as their No. 1 focus. \u201cI\u2019ve been presenting this report to banks across the globe,\u201d Ghanem said. \u201cAll of them are confirming what I\u2019ve told you.\u201d<\/p>\n Capgemini considers high-net-worth individuals anyone with investible assets of $1 million and above, excluding their primary residence, and divides these HNWI millionaires into several categories: \u201cmillionaires next door\u201d with $1 million to $5 million in investible assets, midtier millionaires <\/strong>with $5 million to $30 million, ultra-HNWI with $30 million or more. Their net worth fell to $83 trillion at the end of 2022 from $86 trillion in 2021, Capgemini\u2019s report found.<\/p>\n Some regions were hit harder than others. \u201cDifficult macroeconomic conditions led to bearish global markets and significant declines in indices across regions. Following suit, globally, HNWI wealth and population totals dropped by 3.6% and 3.3%, respectively, as compared to the prior year,\u201d the report added. \u201cWhile still the wealth leader, North America registered 2022\u2019s steepest declines, with total HNWI wealth falling by 7.4% and population by 6.9%.\u201d<\/p>\n \u201cThis is where people are today,\u201d Ghanem said. \u201cHigh-net-worth individuals are taking a wait-and-see approach, ready to make the next investment when the right opportunity presents itself.\u201d Many cash investors are looking at 5%-plus interest. But he remains optimistic about equities in the long term. \u201cEveryone is saying, \u2018Something positive will happen, and I want to be able to act fast on it,\u2019\u201d he added. \u201cThey\u2019re saving their assets to do the job.\u201d<\/p>\n<\/p><\/div>\n
\n SPX,
\n
\n has rallied more than 14% so far in 2023 and is up nearly 15% over the last 12 months. The rally has been concentrated, however, in megacap tech stocks, leaving much of the market behind. An equal-weight measure of the S&P 500 is up just 4.4% so far this year and 8.8% over the last 12 months, according to FactSet.<\/p>\nSearching for a middle ground<\/h2>\n
Wealth preservation is the No. 1 focus<\/strong><\/h2>\n