Market spikes in Asia, Europe and North America have investors wondering whether the return of volatility is a temporary phenomenon or a harbinger of longer-term shifts. Those wondering what to do next may want to pay attention to financial professionals who think volatility may become more common.

Three hundred financial advisors1 surveyed by Natixis Investment Managers’ Center for Investor Insight reveal concerns about the effects of geopolitical events, rising rates, asset bubbles and increased volatility on investment performance. The professionals surveyed see many investors making the following mistakes:

Mistake #1: Becoming Complacent About Risk
According to the survey, 82% of financial advisors believe that the years-long bull market has made many investors complacent about the potential for risk in their portfolios. Moreover, while interest rates have been low for years, they are starting to climb. As rates increase, so do risks, especially volatility. The S&P 500®2 reacted with a -4.8% three-day decline immediately following the Fed’s announcement on March 21, 2018.

Were investors prepared for the drop in values? Financial advisors don’t think so: Sixty-four percent of advisors said that investors are not prepared for a market downturn. Such events can increase the potential for investors’ emotions to run high, resulting in costly actions that could disrupt their long-term plans. In fact, advisors say that investors’ single biggest mistake is making emotional investment decisions.

But advisors believe an even bigger problem may be that many investors do not understand risk or factor it into their long-term plans. Ninety percent said investors don’t even recognize risk until it’s been realized in their investments. After experiencing the euphoria that comes from nine years of bullish returns and low volatility, it’s likely that even a brief disruption could result in panic for investors who do not have a clear grasp on their long-term goals.

The key lesson for individuals: Re-evaluate how much risk is really in your portfolio, and reassess how much risk you’re willing to take in changing markets. Moreover, don’t lose sight of those long-term goals when markets gyrate.

Mistake #2: Underestimating the Impact of Market Volatility
One upshot of the low-rate environment has been low levels of volatility. Of course, there have been sudden spikes such as the Taper Tantrum in 2013, the Flash Crash in 2015, Brexit in 2016 and this February’s market correction, but in each case, markets returned to a steady climb.

In fact, from March 2009 through March 2018, the S&P 500 delivered an annualized return of more than 15%, while volatility (as measured by the Chicago Board of Options Exchange Volatility Index, or VIX3) has been relatively stable. If you’re like the 62% of investors in Natixis’ 2017 Global Survey of Individual Investors4 who say volatility undermines their ability to reach savings goals, you’re probably relieved that markets have been relatively quiet.

That is likely to change. According to Natixis’ recent survey, 61% of financial advisors project increased market volatility in 2018 due to rising interest rates. More than half of the professionals surveyed believe that rising volatility will have a consequently negative impact on overall investment performance in 2018.

With this risk, professionals recognize a key drawback for investors in volatile markets – 86% say individuals are too focused on short-term performance and could pass over opportunities for long-term gains. In such an atmosphere, it can be difficult for investors to balance their hopes for returns with fears about risk. In 2017, three-quarters of investors said that, if given the choice, they would choose safety over performance.5

Now, before volatility steps back up, may be a good time for investors to reevaluate their long-term goals. Are they comfortable with the risks they’ll need to take to achieve those goals?

Mistake #3: Getting Lulled into a False Sense of Security about Passive Investments
Low interest rates, low volatility and high market returns have led to increased popularity for passive investments, such as index funds. While many see an opportunity to achieve market returns at a lower fee, three-quarters of financial advisors surveyed caution that investors are unaware of the risks of passive investing.

Our survey found that, while investors believe that index funds can give them returns comparable to the market and are cheaper, they assume even greater benefits, such as less risk, downside protection and access to the best investment opportunities.6 Yet they may be missing something: Index funds give investors only the returns that the market gives – up and down, with seemingly little risk management.7 Those passive investments don’t offer just the best opportunities, they offer every opportunity – good and bad. And so 73% of professionals conclude that investors have a false sense of security about passive investments.

Looking at the potential for rising interest rates, increased volatility and growing dispersion in stock returns, 83% of financial advisors say today’s market favors actively managed investments. The numbers appear to back up professional sentiment. The Morningstar active/passive barometer, a semiannual report that measures the performance of US active funds against passive peers in their respective Morningstar Categories, shows that as markets became frothier in 2017, 43% of active managers beat their average passive peer.8 Now may be a good time for investors to ensure they know what they are getting into with passive investments.

The Professional View
Financial advisors see big changes coming for the capital markets, but they’re not panicking, and investors would do well to follow their advice. Thoughtful reevaluation of investment assumptions, risk tolerances and long-term financial plans can leave investors better prepared for whatever the markets bring.

David Goodsell is Executive Director of the Center for Investor Insight at Natixis Investment Managers. The Center is dedicated to the analysis and reporting of issues and trends important to investors, financial professionals, money managers, employers, governments and policymakers globally. Goodsell joined Natixis in 2001 after serving with Liberty Funds (now Columbia/Threadneedle) and Fidelity Investments.
1 The Natixis Investment Managers Survey of Financial Professionals was conducted by CoreData Research in March 2018. Survey included 2,775 financial professionals in 16 countries.

2 S&P 500® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.

3 The VIX is the ticker symbol for the Chicago Board Options Exchange (Cboe) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. You may not invest directly in an index.

4 Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research, February-March 2017. Survey included 8,300 investors from 26 countries.

5 Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research, February-March 2017. Survey included 8,300 investors from 26 countries.

6 Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research, February-March 2017. Survey included 8,300 investors from 26 countries.

7 Not every actively managed fund can provide risk management.

8 Morningstar’s Active/Passive Barometer, March 2018. The Morningstar Active/Passive Barometer spans approximately 3,600 unique active and passive US funds that account for approximately $11.1 trillion in assets, or about 61% of the US fund market.

This material is provided for informational purposes only and should not be construed as investment advice.

All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.