U.S. investor optimism dipped in the first quarter as unimagined turmoil roiled the nation’s capital and confusion and delays in the administration of COVID-19 vaccines captured public attention.
The Wells Fargo/Gallup Investor and Retirement Optimism Index fell to +26, down 16 points from +42 in the fourth quarter. This reversed much of the improvement seen in the fourth quarter as the markets surged following positive news about COVID-19 vaccine trials.
The dip in optimism was in part due to investors being less optimistic about their household income. Within the index, investors’ 12-month outlook for inflation dropped the most for the quarter. Slight declines were also seen in investors’ positive forecasts for unemployment, the stock market and economic growth. At the same time, investors’ outlooks for reaching their investment goals were steady.
“The COVID-19 pandemic and ensuing economic and market downturn in 2020 tested investors’ resolve, but patience and resiliency were key in helping them weather the ongoing storm,” said Veronica Willis, investment strategy analyst for Wells Fargo Investment Institute.
The Wells Fargo/Gallup Investor and Retirement Optimism Index included U.S. adults with $10,000 or more in investible assets. The first quarter poll was conducted Feb. 8-16 with 1,53 investors, including 573 black and African American investors weighted to their correct proportion of the U.S. investor population. This oversample was designed to allow for robust analysis of black and African American investors’ views on a range of financial topics.
Despite the downtick in overall investor optimism, black and African American investors’ overall optimism score was +101, significantly higher than the national average. Even so, one in three (31 percent) still said that the pandemic has had a negative impact on their finances.
About one in six black and African American investors (17 percent) said that their current income equals their expenses and one in eight reported they are either drawing on savings (10 percent) or running into debt (3 percent). Nevertheless, seven in 10 reported being able to save a little (53 percent) or a lot (17 percent). Fifteen percent of black and African American investors who have a retirement plan reported taking a loan from their 401(k) or similar type of personal retirement plan since the start of the pandemic.
Nine percent of all investors took such a loan and among this group, the primary reason they cited for tapping their retirement funds was to pay off debt (35 percent). This was followed by 21 percent saying they used it to pay for a major expense, such as medical bills, and 16 percent said to help pay for their normal daily expenses. Another 18 percent said they used it to make a major purchase of some kind while 4 percent used it to help other family members.
“While certain communities continue to be disproportionately impacted by COVID-19, I believe the significantly higher optimism of black and African American investors signals that they see a light at the end of the tunnel,” said David Dawkins, director of Diverse Client Segments at Wells Fargo Advisors.
Looking at black and African American investors’ long-term financial health, nearly all (87 percent) black and African American investors reported having a retirement savings plan (similar to 89 percent among all investors). Additionally, black and African American investors reported similar progress with respect to other financial goals.
The poll asked investors to rank and describe how much progress they have made on six financial-oriented life goals. Progress toward achieving these goals was only slightly lower among black and African American investors, with the exception of saving for a child’s college education, where black and African American investors slightly outpaced all investors.
“Although the data indicates similar progress in achieving financial goals, it still shows an alarming number of investors who are not reporting strong progress toward achieving their goals — particularly the goals with a longer time horizon,” said Dawkins.
Seventy-two percent of black and African American investors said they believe the stock market is a good place for people to invest and grow their retirement savings. However, when asked about their risk tolerance in investing, 38 percent of black and African American investors said they are willing to take on “a lot” or “fair amount” of risk as compared to 47 percent of all investors. Instead, the majority of black and African American investors (54 percent) said they are willing to take “only a little” risk.
This gap in risk tolerance is mainly explained by lower risk tolerance among black and African American men. Black and African American male investors (44 percent) are less willing to take a lot or fair amount of risk with their investments than all male investors (55 percent). There is little difference by race in risk tolerance among females (35 percent of black and African American female investors versus. 39 percent of all female investors).
“While the data still affirms that men tend to be more aggressive investors than women, the racial divide among male investors adds a new layer of complexity,” said Dawkins. “People of color already face additional earnings barriers. Taking on too much or too little risk can perpetuate this. Investors should ensure that their risk tolerance is aligned to their investment objectives to help maximize achieving their goals.”
Having access to financial support from family was a sentiment shared by all investors. However, black and African American investors are more likely to have received such help. Twenty-two percent of all black and African American investors said they have personally received financial help from a family member or friend in the past few years (versus 15 percent of all investors). These investors indicated that family financial support is a two-way street, with 69 percent of this group saying they have provided significant or routine financial help to at least one family member or friend in the past few years, compared to 57 percent of all investors.
