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Index Funds Show Surprised Investors Their Downside

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Many investors who use index funds and exchange-traded funds, thinking them less risky, got a big shock at the start of the year when the S&P 500 took a nosedive, finally bottoming out 10.5% lower in mid-February before starting to regain altitude.

New research from Natixis Global Asset Management showed that some three-quarters of investors in a poll considered ETFs and index funds as both a cheaper and a less risky way to invest.

Sixty-four percent of poll respondents thought index funds would help minimize investment losses, 69% thought they provided better diversification and 61% believed they offered access to the market’s best investment opportunities.

“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have,” John Hailer, chief executive of Natixis for the Americas and Asia, said in a statement.

“Index funds have a place in portfolios, but their low cost seems to be providing a ‘halo effect’ that could blindside investors during volatile markets.”

Natixis, which provides investments in alternatives, ESG and other strategies, said its research showed that since 1928, the S&P 500 Index has experienced a 10% correction more than once a year and a 5% drop more than three times a year on average.

Natixis conducted an online poll in February of 750 individual investors across the U.S. with a minimum of $200,000 in investable assets. The survey was part of a larger global study of 7,100 investors in 21 countries from Asia, Europe, the Americas and the Middle East.

Beyond Traditional Investments

Sixty-five percent of investors polled said a traditional 60/40 equities/bonds allocation no longer worked as a way to pursue returns and manage investments.

Instead, they appeared open to considering alternative investments, with 70% wanting new strategies less aligned with broad markets and 75% favoring ones that could help them better diversify their portfolio.

Yet only slightly more than half of respondents said they owned alternative assets.

Fifty-six percent of those who did not have private equity, long/short funds, hedge funds or real estate in their portfolio considered these alternatives too risky, and 34% said they did not understand them. Twenty-eight percent simply did not think they needed to invest in alternatives.

Hailer said it was clear the financial industry needed to provide more education to help investors make informed decisions.

Indeed, 42% of respondents said they would be better able to achieve their investment objectives chiefly by learning more about investing.

The Natixis poll found that investors understood that exogenous events could roil the financial markets over the coming year. Forty-one percent of those surveyed saw a global economic slowdown as the biggest threat.

Others listed a domestic recession, the presidential election, interest rates and oil prices as potential causes of market volatility.

But what if any of these events should come to pass?

According to the survey, 60% of respondents acknowledged it was hard to control their emotions during market swings, and 66% said they felt helpless to protect their portfolio from market turbulence.

At the same time, 65% claimed that market shocks would not cause them to veer from their long-term investment strategy, and 79% said long-term growth outweighed short-term gains. Role of Advice

Natixis reported that 48% of survey participants worked exclusively with a personal financial advisor, and 6% used only robo-advisors. Another 14% used both personal and automated online services.

Seventy-one percent of investors said professional advice was worth paying for, and 73% said investors who used advisors were likelier to achieve their financial objectives than those who did not have an advisor.

In addition, investors said they would most value getting the following things from a financial advisor:

  • 43%: Help making more informed investment decisions
  • 42%: Help setting goals and making plans
  • 40%: Personalized advice in times of market volatility

Many investors in the study also expressed interest in making investments that took environmental, social or governance factors into consideration.

Seventy-six percent said it was important to invest in companies that reflected their personal values, including those that have a positive social impact and a good environmental record and are ethically run.

This finding mirrored the results of a recent Morgan Stanley survey of individual investors in which 71% of respondents and 84% of millennial investors expressed interest in sustainable investing, which includes ESG considerations. 

However, only 57% of respondents in the Natixis survey reported having discussed socially responsible investing with their financial advisor.

“Fortunately investors know they need help from a professional, but they want more than an investment recommendation,” Hailer said.

“Advisors need to make sure they are making every effort to listen to investors and personalize their services to best meet investors’ needs and goals.”

— Check out Why Active Management Comes Up Short on ThinkAdvisor.


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