Even as global markets strengthen, fueling an intense focus on growth as an investment priority, many investors remain fearful of losses and lack direction about how to move ahead, according to a new survey.
Researchers at Natixis Global Asset Management found that U.S. investors are beginning to fall into two groups. One is stuck at an impasse with competing desires for growth and stability. They and their investment portfolios are at risk of falling short of their financial goals.
The other group is at a turning point, ready to reset their expectations and approach to investing.
“Many investors have set aggressive investment targets, but don’t have a realistic way of reaching them,” John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia, said in a statement.
“Something has to change. The markets have reached new heights and investors feel generally comfortable about portfolio performance. But without a plan that incorporates individual risk and personal benchmarks, the odds are diminished that investors will meet their goals.”
Natixis surveyed 1,050 investors across the U.S. as part of a survey of nearly 6,000 investors in 14 countries.
Pie in the Sky
Respondents said they needed average annual returns of 9.8% above inflation to meet their financial needs, which included providing income in retirement, and housing and health care expenses.
“This is an ambitious goal that could drive investors to take on more risk than they can handle,” Hailer said.
With average yearly inflation of 4.2% since 1964, this means investors would actually need to earn 14% to meet their needs, Natixis pointed out. The S&P 500 index has gained an average 10% annually over the past 50 years.
But while 71% investors said asset growth was increasingly more important than principal protection, 56% said they were willing to take only minimal risk to achieve high yields.
“This demonstrates a great opportunity for financial advisors and the industry to help educate investors on realistic expectations and strategies to reach their goals,” Hailer said.
According to the survey, 76% of investors own only investments they understand well — yet just one-quarter felt their overall investment knowledge was very strong. And a mere 12% had strong knowledge of investments not correlated to the broader market.
When they did make investment decisions, 79% of investors said they simply followed their gut instinct.
“Fifty percent have no clear investment goals, and 54% have no financial plan,” Hailer said. “So it’s not surprising that when asked how they define investing success, some look at asset levels and others look at comfort level rather than meeting long-term financial goals.”
Fifty percent of respondents said they relied on the current level of their total assets to measure investment performance, and 49% relied on comfort level. Only 37% cited long-term financial success.
Shift in Behavior and Expectations
The survey found that market volatility had eroded confidence for 49% of investors, and 60% said they no longer believed traditional asset allocation strategies that rely solely on a mix of stocks and bonds were the best way to pursue returns.
“Investing today is complicated, and there’s a lot of noise in the market,” Hailer said. “It’s no wonder investors are conflicted.”
He noted, however, that they were beginning to understand that market indexes might not be the best benchmark for their personal success. “They’re looking for a better strategy to help them stay invested for the long term.”
In what could be a turning point in investor behavior, attitudes and expectations, Natixis found that 82% of respondents would be willing to set a target for investment returns that was independent of overall market returns.
Eighty-one percent of investors were aware they needed to invest using their own goals.
Eighty-four percent said they would be satisfied to achieve their long-term investment goals, even if those underperformed the market in a given year. Indeed, 69% said they would be happy to achieve 10% returns even if the overall market gained 25%.
Seeing the Light
Americans’ willingness to change their approach may be driven by growing awareness that they face increased risks of not having enough income to meet their needs in retirement, according to Natixis.
Fifty-three percent of investors identified the uninsured cost of long-term care in old age as a major risk to their financial security in retirement, an increase from 40% in Natixis’ 2013 survey of 750 individual American investors.
Natixis said that given rising life expectancies in the U.S., investors may need income to fund more than two decades of retirement costs, but only 27% of respondents were very confident their current investment strategy was on track to deliver stable income.
Asked where they would turn if their retirement funding fell short, 46% said they would continue to work, while 31% said they would rely on support from family members.
Only 19% expected to be able to rely on the government, a reflection that Americans are beginning to accept the reality that they will be responsible for financial security in retirement, according to Natixis.