Our first sentiment survey was open from 3/12/2010 through 3/18. We were a little bit disappointed with the response rate, but we hope that will grow over time. 138 people clicked on the post, but only 87 actually took the survey this week. (We’re not sure what the other 51 respondents were afraid of, but your input is for a good cause.) If you believe, as we do, that markets are driven by supply and demand, client behavior is important. We’re not even asking you what you think of the market–since most of our blog readers are financial advisors, we’re asking instead about the behavior of your clients. Then we’re aggregating responses exclusively for our readership. Your privacy will not be compromised in any way.
After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of even our smaller-than-desired sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least two other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.
Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?
Chart 1: Greatest Fear. 76.5% of clients were fearful of a downturn, while only 23.5% were afraid of missing an upturn. Obviously, as the survey moves through time we expect the information will become more valuable. Still, that seems like a significant amount of fear on the part of clients, especially given how good the stock market has been over the past year.
Chart 2. Greatest Fear Spread. One of the other ways to look at this data is to examine the spread between the two groups. That spread is now at 53%. Chart 2 is constructed by subtracting the percentage of respondents reporting clients fearful of missing an upturn from the clients reported as fearful of a market downdraft. My impression is that this is a large spread, but more data and more time will certainly lend some perspective.
Question 2: Based on their behavior, how would you rate your clients’ current appetite for risk?
Chart 3: Average Risk Appetite. The average risk appetite clocked in at 2.72, slightly below the neutral level. The second question is designed not only to validate the first question, but also to gain more precision and insight about the reported risk appetite of clients. This chart will plot the average risk appetite through time. With only one completed survey, this chart is not very informative yet, but should become much more interesting with more data and an overlay of the S&P; 500 price.
Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. Right now the bell curve is biased to the low risk side, but this shape will no doubt transform as we go through bull and bear markets over time.
Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups. We would expect that the downdraft group would have a lower risk appetite–bigger yellow bars on the left–and that is what we see. The more aggressive group, worried about missing an upturn, would be expected to have a higher risk appetite–bigger green bars on the right. Again, that is how the data shakes out. This is an important validity check.
Chart 6: Average Risk Appetite by Group. A plot of the average risk appetite score by group is shown in this chart. The fear of downdraft group had an average risk appetite of 2.45, while the fear of missing upturn group had an average risk appetite of 3.55. The downdraft group should theoretically always have a lower risk appetite, but it will be interesting to see if the two groups change their risk preferences in unison or if there are timing differences.
Chart 7: Risk Appetite Spread. This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group. The spread is currently 1.10. There is only one data point now, but this should be interesting to follow over time. Theoretically, it should be oriented the same way as the Greatest Fear spread chart, but we’ll see what happens in real time.
As time goes on, we will get a better feel for the most useful ways to present this sentiment data. We think it will be a unique sample because, unlike most of the existing sentiment surveys, it employs a third-party rating system, where advisors rate client behavior. As a result, it has the potential to be more accurate than sentiment surveys that rely on self-reports. Thank you for participating. We look forward to even more of you responding when we open the next survey on March 26!
