Investors Conflicted Over Return Expectations, Risk Tolerance

Results from a new survey show that investors continue to have unrealistic expectations for investment returns, but their tolerance for risk is lower and few truly understand the ramifications of market volatility.

Natixis Investment Managers’ survey of 750 individual investors in the U.S. found that 7 out of 10 feel financially secure and more than half (52%) say the long bull market bolstered their confidence that they are on track to reach long-term financial goals. A closer look, however, reveals that investors may have an unrealistic understanding of risk and return, particularly among those whose only investing experience has been in the 10 years since the financial crisis.

In its report, “Out of the Chaos and into Conflict,” the firm notes that many investors today (78%) – including 86% of those who started investing after the financial crisis – are confident their portfolio is properly diversified. Yet, slightly more than half (51%) admit they can’t identify most of the underlying investments in funds they own. Moreover, just 53% of respondents overall said they have rebalanced their investments in the past year.

“This leaves these investors potentially unaware of overweighted exposure to certain sectors and geographies that have grown disproportionately faster than others and may need rebalancing,” the report states.

Volatility Avoidance

The study further suggests that investors may understand risk in theory, but it’s often tested only after they experience it. According to the data, 92% of investors consider it more important for their investments to deliver long-term results than short-term gains, yet 28% apparently are focused on short-term performance and 26% tend to sell off investments during periods of market volatility.

An even higher percentage of investors (41%) who started investing after the financial crisis admit they tend to sell off assets when markets are volatile, possibly reflecting their lack of experience managing volatility and the potential to use it to their advantage. In fact, just 28% of respondents see volatility as an opportunity to get ahead. Perhaps more troubling, according to the report, is that some investors (11%) believe they need to avoid volatility altogether.

Meanwhile, the annual returns (above inflation) investors say they need to achieve to reach their goals is 9.8%. This is compared to 8.9% last year and 43% higher than what financial advisors think is realistic (6.3%), the report notes.

Perhaps even more unrealistic is that those who weren’t invested during the financial crisis are seeking annual returns of 11.3% to achieve their investment goals. Achieving this level of returns would mean assuming more risk, yet investors demonstrate a clear aversion, the report explains. In fact, 85%of survey respondents say they would choose safety over investment performance, up from 81% last year.

What’s more, nearly half (48%) believe they are exposed to even greater market risks today than they were before the 2008 financial crisis – a sense of unease that seems to conflict with investor behavior and high return expectations.

Despite the gains investors have enjoyed during the long bull market, 65% feel as though it’s only gotten tougher to get ahead financially. At the same time, however, investors are willing to place their trust in the financial system. When it comes to making financial decisions, 70% trust financial institutions and 75% trust financial advisors generally. In fact, most investors (68%) say those who have a professional financial advisor are more likely to reach their financial goals.

“A decade of rising markets, low interest rates and subdued volatility may have given investors unreasonable expectations and a false sense of security,” suggests David Giunta, Natixis Investment Managers CEO for the U.S. and Canada. “Our research suggests many investors’ instincts could undermine their financial success as volatility returns to the markets, but their continued trust in their financial advisors should help them remain disciplined as markets become more turbulent.”

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