Tue, 13/05/2014 - 10:07
US investors are beginning to fall into two groups, one stuck at an impasse with competing desires for growth and stability, and the other at a turning point, ready to reset their expectations and approach to investing.
That’s according to a survey published by Natixis Global Asset Management.
“Many investors have set aggressive investment targets, but don’t have a realistic way of reaching them,” says John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia. “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, which manages more than USD899 billion in assets through its affiliates, surveyed 1,050 investors across the US as part of a global survey of nearly 6,000 investors in 14 countries around the world. It found that while strengthening global markets have fuelled a renewed and urgent focus on growth as an investment priority, many investors remain fearful of losses and lack direction about how to move forward.
According to the survey, Americans say they need average annual returns of 9.8 per cent above inflation to meet their financial needs, including providing income in retirement, housing and healthcare expenses.
“This is an ambitious goal that could drive investors to take on more risk than they can handle,” says Hailer.
With average yearly inflation of 4.2 per cent since 1964, these investors would actually need to earn 14 per cent to meet their needs, surpassing the 10 per cent average annual gain of the Standard & Poor’s 500 Index over the past 50 years.
But, while seven in 10 (71 per cent) investors say asset growth is increasingly a priority over principal protection, 56 per cent say they are only willing to take minimal risk to achieve high returns.
“This demonstrates a great opportunity for financial advisors and the industry to help educate investors on realistic expectations and strategies to reach their goals,” says Hailer.
According to the survey, three-quarters (76 per cent) of investors only own investments they understand well – yet just one-quarter feel their overall investment knowledge is very strong. Only 12 per cent have strong knowledge of investments not correlated to the broader market.
When they do make investment decisions, more than three-quarters (79 per cent) of investors say they simply follow their gut instinct.
“Fifty-per cent have no clear investment goals and 54 per cent have no financial plan, 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,” says Hailer.
The two top indicators investors rely on to measure investment performance are (1) the current level of their total assets (50 per cent) and (2) comfort level (49 per cent) with long-term financial success cited only 37 per cent of the time.
Market volatility has eroded confidence for nearly half of investors (49 per cent), and six in 10 no longer believe traditional asset allocation strategies that rely solely on a mix of stocks and bonds are the best way to pursue returns.
“Investing today is complicated. And, there’s a lot of noise in the market,” adds Hailer. “It’s no wonder investors are conflicted. But, they’re beginning to understand that market indexes may 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 behaviour, attitudes and expectations, Natixis found that 82 per cent of investors say they would be willing to set a target for investment returns that is independent of overall market returns.
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. Their biggest concern is the uninsured cost of long-term care in old age, which 53 per cent of investors identify as a top risk to their financial security in retirement; that’s an increase from 40 per cent in Natixis’ 2013 survey of individual investors.
Given the increase in life expectancies in the US, investors may need income to fund more than two decades of retirement costs, and only 27 per cent of investors are very confident their current investment strategy is on track to deliver stable income.
Asked where they would turn if their retirement funding fell short, 46 per cent of Americans say they will continue to work and 31 per cent would rely on support from family members. Only 19 per cent expect 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.
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