BOSTON, July 16, 2019 – Market volatility has been a wake-up call for many US investors whose high return expectations don’t accurately reflect their appetite and understanding of risk, particularly when it comes to active and passive investing. According to a new survey released today by Natixis Investment Managers, investors cited market volatility as the biggest threat to their investments this year, and nearly half (47%) would be willing to pay a premium for volatility protection. Nearly two-thirds (64%) are considering new strategies to help diversify their portfolios.
Natixis fielded a survey of 750 individual investors across the US in the first quarter of this year when 2018 losses were still fresh in investors’ minds. Going into 2019, eight in ten (83%) investors said they understand the risks posed by the market. Nearly the same proportion (82%) of investors also felt they were prepared for market risks at the start of 2018, although in looking back, only 59% say they were actually prepared for last year’s downturn. On the heels of one of the most challenging markets in a decade, investors’ return expectations grew in the face of losses, but their comfort level for risk is in question. According to the findings:
- US investors’ long-term return expectations jumped to 10.9% (above inflation) from 9.8% in 2018, and they expect 10.1% for 2019; nine in ten investors (91%) believe it’s important to protect their assets in periods of volatility.
- If forced to choose, most investors (77%) would take safety over performance.
- 71% of investors know portfolio fluctuations of 10% are not an unusual occurrence.
“The record bull market continues to create a growing disconnect between what investors expect from the market and what is realistically achievable, especially given their aversion to risk,” said David Giunta, CEO for the US and Canada at Natixis Investment Managers. “Last year’s market volatility was a strong reminder of the importance of professional advice in helping to build diversified portfolios tailored to both investors’ goals and their risk tolerance.”
The findings suggest that many investors are unprepared for the realities of investing risk in turbulent markets and need help building stability into their portfolios. For example:
- Just 30% of investors know that, when interest rates rise, bond prices fall, and only 9% recognize that lower bond prices mean higher bond yields, or income, in the future.
- Just 2% of investors correctly understand that when interest rates rise, the price of bonds decreases and income received from bonds in the future increases.
- 64% believe investing in index funds helps minimize losses, yet 56% realized index funds are riskier than they thought after experiencing the steep market decline at the end of 2018.
“This year’s study shows that investors ultimately are confused and need a refresher course on what they actually get out of index funds,” said Dave Goodsell, Executive Director of Natixis’ Center for Investor Insight. “We’ve found that, for half of investors, last year’s volatility made them realize index funds were actually riskier than they had once thought.”
Preference for true active management and advice
Natixis found that, despite the popularity of index investing, investors’ expectations more closely align with active versus passive strategies. Investors also seem more discerning about this type of investing and expect to receive pure active management for fees paid. According to the survey:
- 65% of investors say it is important for their investments to give them a chance to beat the benchmark for the asset class.
- 69% say it is important to have the ability to take advantage of short-term market movements.
The survey also found that the sting of last year’s volatility remains, and it has translated into a renewed focus on alternative investments. Five in ten (51%) investors say volatility has them looking for investments other than stocks and bonds, but few investors are adding alternatives to their portfolio. Just 38% of investors surveyed say they own alternative investments, and 16% don’t know if they own them; that number is up from 11% in 2017.2 As the Natixis report states, this is an area that demands better investor education about investments overall, and alternatives in particular.
Natixis’ previous surveys have found that most investors believe those who have a professional financial advisor are more likely to reach their financial goals.3 Advisors have an important role to play in helping investors to better understand their own risks and to build portfolios that match their risk tolerance.
Another key finding of the study shows investors’ more conservative outlook goes well beyond market risks. When asked about their financial fears this year, nearly half (49%) of investors say their greatest fear is a large unexpected expense along with healthcare costs (also 49%). Beyond those, investors worry about taxes (39%) and maintaining their standard of living (35%).
