Market volatility has been a wake-up call for investors

Natixis survey finds most investors favour safety over performance if they had to choose

Market volatility has been a wake-up call for investors
Steve Randall

A disconnect between the high-return performance expectation and understanding of risk among investors has been highlighted in a new report.

A survey of investors by Natixis found that the recent market volatility has been a wake-up call and almost half of respondents said they would pay a premium for volatility protection.

Almost two thirds of investors said they are now considering how to diversify their portfolios to mitigate market volatility.

The poll also revealed that 83% said they understood the risks posed by the market and around the same share felt prepared for the risks at the start of 2018; but when looking back to that time, the percentage who say they were actually prepared was 59%.

“The record bull market continues to create a growing disconnect between what investors expect from the market and what is realistically achievable, especially given their aversion to risk,” said David Giunta, CEO for the US and Canada at Natixis Investment Managers. “Last year’s market volatility was a strong reminder of the importance of professional advice in helping to build diversified portfolios tailored to both investors’ goals and their risk tolerance.”

Knowledge gap
Investors are adding to risk by not understanding some potential pitfalls for their portfolios.

Just 30% of investors know that, when interest rates rise, bond prices fall, and only 9% recognize that lower bond prices mean higher bond yields, or income, in the future.

And a tiny 2% of investors correctly understand that when interest rates rise, the price of bonds decreases and income received from bonds in the future increases.

Two thirds believe investing in index funds helps minimize losses, yet 56% realized index funds are riskier than they thought after experiencing the steep market decline at the end of 2018.

“This year’s study shows that investors ultimately are confused and need a refresher course on what they actually get out of index funds,” said Dave Goodsell, Executive Director of Natixis’ Center for Investor Insight. “We’ve found that, for half of investors, last year’s volatility made them realize index funds were actually riskier than they had once thought.”

Investor choices
The poll also provides some insights into investors’ preferences.

Although index investing is popular, the figures show that investors’ strategies are more in line with active management than passive options.

Around two thirds, say it is important for their investments to give them a chance to beat the benchmark for the asset class and 69% say it is important to have the ability to take advantage of short-term market movements.

Alternative investments have also become more interesting for investors amid 2018’s volatility.

More than half of respondents want more than just stocks and bonds in their portfolios, but just 38% said they have alternative investments and 16% didn’t know if they did.

When asked about their financial fears this year, nearly half (49%) of investors say their greatest fear is a large unexpected expense along with healthcare costs (also 49%). Beyond those, investors worry about taxes (39%) and maintaining their standard of living (35%).