Our sentiment survey was open from 3/26/2010 through 4/1. The response rate picked up quite a bit–we had 110 responses this week versus only 87 last survey. 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 asking 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 our 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. 75.7% of clients were fearful of a downturn, down very slightly from last survey’s 76.5%. Only 24.3% were afraid of missing an upturn, slightly higher than last survey’s 23.5%. Client fear is slowly abating, although it still seems like it is at a relatively high level, especially considering how good the stock market has been over the past year.
Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. That spread is now at 51%. 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. This still feels like 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 this week was 2.71, basically unchanged from last survey’s 2.72 reading. This question is designed to validate the first question, but also to gain more precision and insight about the reported risk appetite of clients.
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.
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 fear of downdraft group would have a lower risk appetite than the fear of missing upturn group and that is what we see here.
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 missing downdraft group had an average risk appetite of 2.56, while the fear of missing upturn group had an average risk appetite of 3.04. Interestingly, while the downdraft group had very little change from the last survey, the upturn group had its risk appetite drop quite a bit from 3.55 last survey. I’m not quite sure what that means yet, but I’m sure we’ll see more of a pattern as time passes.
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 0.48, which seems like a pretty big drop from last survey’s 1.10. This is largely due to the drop is risk appetite from the missing upturn group. We may learn more as the chart develops.
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!
