Four in five (83 per cent) US investors worry they will not be able to meet their retirement income goals, and 77 per cent are concerned about outliving their assets in retirement, according to a study by Natixis Global Asset Management.
While they know they need more assets, 53 per cent say their fear of losing money due to market volatility limits what they invest, and 58 per cent say they will take on only minimal investment risk, even if it means sacrificing returns.
According to the survey, investor fear is driven by the past decade’s market volatility:
• Seven in ten investors say that volatility has eroded their confidence in the markets (71 per cent) and reduced their expectations for future investment returns (70 per cent).
• Eight in ten investors are worried about a wide range of other economic and policy issues, including consumer confidence (89 per cent), higher taxes on investment (88 per cent) and earned (85 per cent) income, the European debt crisis (87 per cent) and political uncertainty due to this year’s elections (85 per cent).
• Just 28 per cent say they are “highly confident” in their portfolios’ ability to manage volatility, and 53 per cent agree that stability in volatile times is their top investing priority.
• 57 per cent say they are not reducing the cash investments in their portfolios.
“Individual investors are concerned about achieving their long-term financial goals. They recognize that they need to grow their savings, but they are paralyzed by fear and uncertain about how best to generate returns or protect principal in today’s volatile markets,” says John T Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia. “They would like to try new ways of investing, but they would also like to sleep at night. There are strategies that can help investors manage risk and create a durable portfolio, but investors don’t yet know enough about them.”
Investors are willing to look to new asset allocation and diversification strategies to address their fears. Nearly seven in ten investors (69 per cent) agree that it is time to replace traditional techniques with new approaches. Three-quarters (75 per cent) say the traditional portfolio allocation with 60 per cent in stocks and 40 per cent in bonds is no longer the best way to pursue returns and manage risk.
Many investors already are prepared to look at new ways to build portfolios. Four in five (85 per cent) say it is important to have different types of investments in their portfolios, including 54 per cent who say it is “very” important. In fact, nearly half (46 per cent) say they regularly consider whether an investment will generate returns that are uncorrelated to the markets.
“Building a durable portfolio is not only about capital allocation; it’s also about risk allocation. Investors need to start by looking at potential risks embedded in their existing equity and fixed income investments, and then consider strategies such as alternative investments – including hedging strategies, commodities, currencies and managed futures – to control volatility while still having the ability to achieve their goals for returns,” says Hailer.
Although more than half of investors (52 per cent) say they are interested in investment products that are unrelated to the performance of the broader markets, only two in five (39 per cent) currently invest in alternative investments.
The biggest barrier to participation in alternative investments is a lack of knowledge. Nearly seven in ten (68 per cent) investors say they invest only in products they understand, and 48 per cent say they have little or no understanding of alternative investments. Nearly two-thirds (64 per cent) say they need to learn more about alternatives before they would consider investing in them.
Financial advisers are best-positioned to help investors become comfortable with alternative investments and other new strategies. Half of investors (51 per cent) said they would consider alternative investments for their portfolios if their advisers recommended them. However, only 35 per cent of investors say they have discussed alternatives with their advisers.
Investors are increasingly willing to engage their advisers, with 62 per cent agreeing that they are more interested in discussing risk with their advisers than ever before and 59 per cent saying that they are revealing their expectations to their financial advisers more than before.
“Market volatility is likely here to stay, and investors need portfolios that can help them achieve their goals whether markets are moving up or down. Financial advisers have an important role to play in educating their clients about how to build durable portfolios that can smoothly navigate this risk and volatility, perform in both up and down markets and help investors achieve their goals for retirement,” Hailer says.