Millionaires feeling less wealthy

A million dollars just isn’t what it used to be. A survey of American millionaires conducted by Fidelity Investments found that nearly half (46%) do not feel particularly wealthy and are looking for ways to rebuild their wealth.

These survey respondents were not simply millionaires in name alone; they had an average of $3.5 million in investable assets and an average annual household income of $306,000.

While the survey was conducted in the U.S., the findings are likely transferable across the border to some extent.

On average, these households reported a 19% drop in income over the past year, with a matching decline in investable assets, and a 28% drop in real estate values. Last year, only 19% admitted that they did not feel wealthy.

Among those who do not feel wealthy, $1.8 million appears to have been the threshold for that sentiment. When asked how much it would take for them to feel wealthy again, the average response was $7.5 million.

“While many millionaires recognize they are doing better than the average investor, last year’s market volatility and loss of assets have forced them to reassess what the term ‘wealthy’ really means to them,” said Gail Graham, executive vice-president of Fidelity Investments.

Fidelity Investments’ third annual Millionaire Outlook survey found that the wealthy are taking advantage of the opportunity presented by the market downturn and are reassessing their portfolios.

“Although most investors hesitate to take action and become gripped by inertia during a market downturn, our research shows that millionaires tend to use this time as an opportunity to reassess and make those tough decisions about their portfolios that can help get their finances back on track,” said Michael Durbin, president of Fidelity Institutional Wealth Services.

Durbin says the wealthy are drawing on past experience with market turmoil and are preparing for the eventual rebound. Many are returning to equity markets and increasing their allocation to stocks.

Half of the survey respondents said they were selling off their worst-performing investments to create capital losses, which they will use to offset capital gains realized from new purchases.

This tax-loss selling is taking on new urgency in the eyes of millionaires, as 72% expect taxes on capital gains will rise over the next five years. Dividends and income are also expected to be more heavily taxed. Almost a third (29%) will invest more in tax-advantaged mutual funds to avoid higher dividend taxes.

More than three-quarters (77%) said this is the worst market downturn that they have experienced, and 78% said they had investing experience in each of the last four downturns, ranging from the 1970s to the early 2000s.

Those who said they were buyers in past downturns had, on average, $1 million more in investable assets than their more conservative counterparts.

Still, they didn’t become wealthy by taking excessive risks. Thirty-four percent said fixed income products offered the best potential returns over the next 12 months, compared to 28% who favoured individual stocks. In terms of what they were actually investing in, however, the gap narrowed: 32% in fixed income and 31% in stocks.

On a longer time horizon, stocks are clearly preferred, with 44% saying they offered the best five-year return, compared to just 6% favouring fixed income.

They are particularly bullish on their own domestic economy, with 62% identifying the U.S. as the best place to invest over the coming year and 60% saying it would provide the best five-year return. China ranked second for both time horizons.

While the U.S. markets have already rebounded substantially off their lows since March, survey respondents said there is still plenty of room for growth. Forty-four percent said they would be comfortable investing in the Dow Jones Industrial Average if it were between 8,000 and 11,000. The Dow is currently around the 8,500 mark.

They are not, however, particularly optimistic toward the U.S. economy as a whole. On a scale from +100 (most positive) to -100 (most negative), the average score for the current environment was -91, down from -50 a year earlier.

A recovery is expected in 2010, though, with the survey returning a score of +28 for next year’s outlook.

The millionaires’ advice to the average investor: stay the course; remain calm and be optimistic; and cut back on spending and save more.

(05/06/09)