Stock-Net.com

Fidelity has recently released a new study of the outlook wealthy investors across the US share toward the stock market and the economy in general. Stock-Net highlights and analyzes the results of this interesting survey.

Fidelity surveyed 2500 investors from households with at least $1 million in investment assets. Survey participants were asked their views toward the stock market and how they plan to adjust their investment holdings in the coming year. The survey showed that 30% of survey participants plan to increase their stock investments in 2007, while only 6% of the high-net-worth households plan to decrease their stock investments.

Wealthy investors hold the bulk of mutual fund assets, and the survey is a leading indicator for investment actions that are planned by millionaire households. If these planned actions are carried through, the increase in money flow could limit any downward market moves and support any upward movements.

While wealthy investors were overall feeling optimistic about the economy, they do anticipate becoming more cautious over the next 12 months. Survey results show a significant increase in cautiousness about several sectors of the US economy.

While this may seem paradoxical, wealthy investors seem to be looking at any anticipated economic weakness and resulting stock market weakness as a buying opportunity, and are planning to be ready to increase their investments during the next year.

John Bogle, founder of Vanguard, recently made some comments about his expectations for the market going forward. Reviewing some of Bogle’s market forecasts over the past few years, his calls have been fairly prescient, and Stock-Net readers should take heed. Even though he has stepped down as Vanguard’s chief executive, Bogle still remains very active, speaking frequently, and about to release his sixth book: “The Little Book of Common Sense Investing”.

Bogle is cautious about the future of the market, believing we are in for a period of modest market returns. His counsel for now is to review your current stock allocations, and either stay where you are or reduce your allocations. When asked for some more specifics, he estimates that stocks will average about 7% per year over the next ten years or so.

For his market analysis, he looks at market returns in two pieces: speculative return and investment return. Investment return can be estimated by adding the average dividend (2%) yield to the long-term earnings growth (6%), for an expected 8% long-term investment return.

Speculative return reflects the varying amounts that investors as a whole are willing to pay for earnings, tracked via price/earnings ratios. Bogle expects that the market would go from today’s 17 times trailing 12 month earnings down to around 16 times earnings. This P/E compression would lower the markets overall return to around 7%.

What should an investor do armed with this information? For one thing, it would be wise to further gravitate toward low-cost investments, like low-cost index funds. Replacing an actively managed mutual fund charging 2% per year with an index fund or ETF that charges 0.25% per year will generate significant savings, and when facing a future with modest stock market returns, every little bit helps.