America’s rich have a sober outlook on the U.S. economy headed into 2016, with more millionaires assuming another year with a flat S&P 500 index leading to a lower personal rate of return and a majority belief among millionaires that household income will remain the same. Meanwhile, the rich are concentrating investments in only a few stock sectors, and more so outside the stock market entirely.
Less than half of millionaires (46 percent) believe the S&P 500 will be up by 5 percent to 10 percent next year, according to the Fall 2015 CNBC Millionaire Survey, representing a slight decline from the Spring 2015 survey. But significantly more millionaires think the S&P will be flat in 2016: 25 percent vs. 17 percent last spring.
“Returns will come down,” said Ron Carson, founder and CEO of Carson Wealth Management, who works with many mass affluent clients.
“Overall, not great exuberance,” said Tom Wynn, director of research for Spectrem Group, which conducted the latest millionaire survey for CNBC in October.
And Carson said this outlook is the right one for investors.
“If you’re netting 4 percent to 6 percent and doing it with a level of risk that’s comfortable, that’s pretty good,” the financial advisor said. “And for the next decade, at least, investors need to think about rates of return in the 4 percent to 6 percent range, unless you are willing to take on liquidity or market risk that is high,” Carson said.
Karen Altfest, principal advisor at the investing company Altfest, said that her company is talking to lots of investors who think the S&P 500 will be flat, and specifically, not up enough next year to keep up with their cost of living. For some, that means it is time to rein in spending.
“If you have high spending, no one should promise you a 10 percent [return], and the most important thing to know is that if the U.S. has a healthy economy, it’s realistic to expect a 4 percent to 6 percent return,” Altfest said.
Altfest added that for investors who have benefited from returns in a handful of large-cap stocks, expectations may be unrealistic. “If they think they can keep replicating those returns, they will be surprised in a bad way. You have to think of having a portfolio to leave to your children,” she said.
Carson said most investors should join millionaires in thinking of this outlook as being permanent: “Miilionaires are very understanding of the fact that the days of double-digit returns without having to work are gone,” he said.
Among stocks, three sectors dominate millionaire portfolios: technology, financials and health care. Health care was the surprise among the sectors where millionaires plan to invest more next year. Technology and financials have typically flip-flopped quarter-to-quarter for the top two spots among millionaire stock plays, but health care is ahead of financials for 2016, according to the CNBC Millionaire Survey.
The percentage of millionaires who indicated that the greatest percentage of assets would go to health care jumped from 13 percent to 16 percent. That put health care ahead of financials, where interest dropped steeply, from 23 percent of millionaires saying it would be among their greatest investments down to 12 percent in the fall survey. (The survey was conducted before the Fed announced its intention to begin raising interest rates.)
Meanwhile, millionaire investor conviction for technology stocks remains high: 20 percent of millionaires said tech will get the greatest amount of investment in 2016. “Tech is always the shining star,” Wynn said.
“Tech is priced at high multiples and may not have the same rate of growth, but there has to be tech in a portfolio if you’re an investor, as long as you’re willing to do your homework,” Altfest said.
No other stock sectors are expected to demand a double-digit percentage of assets from millionaires. And millionaires are not jumping into the energy sector as a bottoms-up play: The percentage of millionaires who said energy would be their biggest investment declined from 12 percent in the spring to 8 percent in the more recent survey.
Carson cautioned investors from reading too much into quarter-over-quarter changes in stock-sector bets. “If you’re trying to be that precise, it’s a loser’s game,” he said. “Take a three- to five-year view.”
That said, Carson agreed that tech remains one of the best sectors for investors and also sees among his clients that health care is becoming a larger percentage of holdings.
“Health care has not been this popular before, but as we see more baby boomers getting older and requiring more health care, we will see more interest,” Wynn said. “All these boomers are turning 60 and 70, and health care will go up and be good investments.”
“A millionaire having a hip replacement is going to ask as an investor, ‘What’s this all about?'” Altfest said.
Carson parted ways with millionaires in this survey over energy, believing it a good value play with prices where they are (and while there will be more pain, the larger players will consolidate, and lower prices will bring higher prices eventually). He recommended that investors dollar-cost average into energy, at a level of up to 10 percent of their portfolio, but only 1 percent a month over the next year to smooth out the volatility.
Altfest said it doesn’t surprise her that the millionaire survey results show a lack of interest in Europe and emerging markets as value plays, but she thinks millionaires are wrong.
“We don’t really think most people want to hear it, but we find value in Europe, and we think people should be more open to emerging markets and stocks abroad,” she said. Her firm has a more sizable percentage of investments abroad, and for U.S. investors, she said it will be not as expensive to invest abroad as to continue to invest in U.S. stocks.
Carson noted that his firm’s global portfolio has been a bright spot this year with the U.S. market being flat, but he sees millionaires seizing upon real estate ownership as one of the most interesting opportunities for investors. The CNBC Millionaire Survey found 71 percent of investors claiming their top holding was outside a single stock.
Carson’s firm bought and rehabbed individual homes, and that investment is up 19 percent year-to-date, with an 11 percent dividend yield. However, it’s an illiquid investment that requires a five- to six-year holding period. “If you can give up daily liquidity, you’ll get a better return,” Carson said.
Key findings from CNBC’s Millionaire Survey
• Financials, energy and technology are the largest industry sectors currently in the investors’ portfolios.
• Materials and consumer discretionary investments are the industry sectors with the lowest percentage of investments.
• Technology (20 percent) and health care (16 percent) show the greatest level of investment interest in 2016 (financials fell from No. 1 in the Spring 2015 survey to No. 3, down from 23 percent to 12 percent) .
• Over the next 12 months, equities make up the highest percentage of investments. As age increases, international investing drops. As age increases, fixed-income investing increases.
• In terms of allocation of investments over the next 12 months, retired investors indicate a higher percentage for fixed income and a lower percentage for international investments and investment real estate when compared with their working counterparts.
• Overall, 46 percent of respondents believe the S&P will grow between 5 percent and 10 percent during 2016, a prediction slightly lower than six months ago.
• Many more millionaires said the S&P will be flat in 2016 than in the Spring 2015 survey.
• More than 60 percent believe their household income will remain the same during 2016, with only 19 percent believing it will be higher.
• Most believe their personal rate of return will be in the 4 percent to 6 percent range.