By GREG IP
Staff Reporter of THE WALL STREET
JOURNAL
To be bullish on stocks, it helps to be new at investing.
As stock prices hover at or near records, a new poll indicates that inexperienced investors expect considerably higher returns on their portfolios than do longtime investors -- and are more confident of their ability to beat the market. The least-experienced investors, meanwhile, were least likely to think stocks overvalued.
The survey's findings pose a challenge to Wall Street because they indicate that the millions of Americans who have invested for the first time in the past five years have not yet accepted repeated industry assertions that returns of recent years were unsustainably high. And the poll finds that while most investors with an opinion think the stock market is overvalued, most also think it's a good time to invest.
The poll, commissioned by PaineWebber Inc. and conducted by Gallup Organization, asked 1,200 investors across the country during June about their investing behavior and outlook. It is part of PaineWebber and Gallup's quarterly Index of Investor Optimism. PaineWebber added some of the survey questions at the request of The Wall Street Journal.
Great Expectations
The poll found that on average, investors expect to earn 15.2% on their stock portfolios over the next 12 months. That figure is below the market's annual returns of 25% to 30% racked up in recent years, but far above what most Wall Street analysts consider a normal return of 10% or less.
But the poll also found expectations are highest among investors who have been in the market the shortest period of time. Those with five years or less experience investing -- about one quarter of the sample-expect an 18.1% return next year, compared with the 14.3% expected by those with 21 or more years of experience.
Inexperienced investors are also less likely to be worried about the market's current level. Just 39% of those with investing experience of five years or less said they thought the market was overvalued, compared with 58% of those with 21 years or more.
New investors "haven't lived through enough normal markets," said Mary Farrell, senior investment strategist at PaineWebber. "This has been the best of all worlds we've experienced since 1995. Even today, the Dow Jones Industrial Average is up 15%, year to date, and we're halfway through the year, and the S&P 500 is up almost 20%. People who have only invested in the 1990s have a much shorter-term perception of what is a realistic market return."
"Normal" Could Be Shocking
She called the high expectations "a cause for concern. When we return to the more normal 8% to 10% returns, we don't want investors to perceive them as disappointing."
Mark Sutton, president of PaineWebber's private-client group, added, "If investors plan their retirement or children's education assuming rates of return that are extraordinarily high and don't get them, the disappointment might extend to a change in lifestyle, and not a positive one."
There are signs, however, that individuals' expectations may not be as out of step with reality as the poll results may imply. For example, investors generally expect more from their own portfolios (15.2%) than they do of the overall market (13.4%). Less-experienced investors are most optimistic about their ability to beat the market; those with five years or less experience expect an 18.1% return for themselves, but just 15.8% for the overall market.
Furthermore, average expectations are skewed upward by some relatively high forecasts; investors" median expected return for their own portfolios (that is, half expect more, half expect less) was just 12%, and their median forecast for the market overall was an unremarkable 10%.
Investors themselves report portfolio results that are substantially lower than those recorded by the overall averages. Investors reported a 16.9% return for the previous 12 months, with inexperienced investors reporting the highest returns, at 19.3%. But several factors may affect the usefulness of those results. Answers may have been affected by the day investors were asked-and June was a volatile month. In addition, some investors may have included securities other than stocks in their portfolio calculations.
Responses Don't Add Up
Finally, individual investors may not know precisely their own returns. "We're not talking about professionally audited results," said Ms. Farrell.
Almost half of investors, 46%, think the market is overvalued right now, while 25% consider it valued about right, and 4% consider it undervalued. The remainder, 25%, were unsure or declined to answer.
Thus, while 61% of those expressing an opinion consider the market overvalued, 72% of respondents (76% of those expressing an opinion) still think it's a good time to invest in financial markets.
The responses are "a little inconsistent," says Mr. Sutton, but he notes that whether it makes sense to invest in an overvalued market depends on how long the investor intends to remain invested. He added, "there are a lot of people who thought the market was overvalued for the last two or three years and have been surprised."
Ms. Farrell said the answers are "very indicative of the problem investors face today... . Even an investor who thinks the market is overvalued can't risk not being in the market because nothing else delivers this kind of return."
Compared with three months ago, investors are less optimistic. The index of optimism, which includes opinions on respondents' personal financial situation, and the economic and political climate, declined 5% from April, but is still up 62% from October 1996, when it was established.
The poll was conducted among 1,200 randomly selected adults across the country with total savings and investments of $10,000 or more. Gallup says the results are accurate to within three percentage points.