Investors may have an unrealistic understanding of risk and return: survey

Concerns regarding risk appear to conflict with investor behaviour and high return expectations. How investors behave going forward will depend on how they reconcile their views on “risk, return and financial security with market realities,” the report says.

Of 300 Canadian individual investors surveyed — each with a minimum of $100,000 in investible assets — 75% say they’re feeling financially secure, for the time being. Nearly half of Canadians say the long bull market raised their confidence and believe they are now on track to reach long-term goals; however, the survey also revealed that investors may have an unrealistic understanding of risk and return.

Specifically, 80% of investors are confident their portfolio is diversified yet 60% can’t identify most of the underlying investments in funds they own. Further, 30% of investors are focused on short-term performance and 28% have a habit of selling off investments during periods of market volatility, seemingly unaware of how to use volatility to their advantage.

Lastly, the annual return above inflation that investors say they need to reach their goals is 9.1%, considerably higher than what financial advisors say is realistic (5.7%). To achieve this level of return, investors would need to take on more risk. Yet, a whopping 84% say they would choose safety over investment performance.

“A decade of rising markets, low interest rates and subdued volatility may have given investors unreasonable expectations and a false sense of security,” says David Giunta, CEO for the U.S. and Canada at Natixis Investment Managers, in a statement.

“Our research suggests many investors’ instincts could determine 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.”

Fortunately for advisors, trust in the financial industry is relatively high. Seventy-two per cent of investors trust financial institutions and 79% trust advisors, generally speaking. Moreover, 91% of investors consider their own financial advisor trustworthy, and put much more stock in their advisor’s advice than they would close friends, family and co-workers. Most investors (70%) admit that those who have a professional financial advisor are much more likely to reach their goals.

The report suggests one topic on which advisors may want to educate their clients is active versus passive investments, as investors may be confusing low fees with greater value. Nine out of 10 investors (94%) consider fees an important consideration when choosing investments, and 53% recognize that passive investments, like index funds, usually have lower fees. That said, 55% of investors also believe that index funds pose less risk than other investments and 62% of investors believe index funds can help minimize loss.

“Our survey shows that investors are inclined to prefer active investment strategies but their quest to lower investment costs may be setting unrealistic expectations for what passive investments can actually deliver,” says Abe Goenka, CEO of Natixis Investment Managers Canada, in a statement.

“Investors are caught in conflict and need help understanding a more nuanced argument for each approach.”