Fear of financial loss limits investors’ opportunities: study

The majority of Canadian investors feel financially at ease in the current market environment, yet they’re much more focused on safety than performance. This leads to limitations on the investment opportunities they could take advantage of, according to Natixis Global Asset Management’s 2017 Individual Investor Survey.

Specifically, 72% of investors surveyed said they feel financially secure in the current economic climate and 68% said they are comfortable taking risks to get ahead. However, if investors were forced to choose between safety and performance, 83% would choose safety.

This may be due to the fact that market volatility remains a concern for investors as 52% of them said volatility undermines their ability to reach savings and retirement goals.

“Despite historically low volatility, investors still worry it will undermine their financial goals,” says David Goodsell, executive director of Natixis’s Durable Portfolio Construction Research Centre, in a statement. “After an eight-year bull market, investors still define risk as a loss of assets rather than missing out on opportunity. And despite very high hopes for returns, they say they want safety over investment performance. Investors clearly need a financial professional to help them reconcile these conflicts and achieve their goals.”

One such area in which financial professionals could be of help is in providing more information on the missed opportunities related to passive investing, the report suggests. Specifically, investors have made the transition to index funds and other low-cost passive investments, as they’re wary of higher fees.

Notably, 56% of investors believe passive investments are less risky, 63% said these investments help to minimize risk and 59% believe they’re way to access the best opportunities in the market, “despite the fact that index funds, by their very nature, lack diversification and internal risk management,” says Natixis in a statement.

“The industry brought some of this skepticism on itself through the proliferation of ‘closet indexers,’ managers who charge active management fees for performance that merely tracks benchmark returns, just as index funds do,” Natixis’s statement adds.

Case in point: 76% of investors surveyed believe that some fund managers charge high fees for just tracking an index, which investors say they can also do and at a lower cost.

Another area in which investors could benefit from good advice is alternative investment strategies that go beyond stocks and bonds. Although many investors are open to alternative investments, the Natixis study suggests a lack of education in this area may be a roadblock. For example, 71% of investors believe alternative investing is too complex and 65% say these investments are riskier than traditional asset classes.

“Investors may be confusing the term ‘alternative investments’ with a smaller group of complex, higher-risk strategies such as hedge funds,” the firm says.

Lastly, the study shows that investment decisions factoring in environmental, social and governance (ESG) values are increasing in demand as 61% of investors have spoken with their advisor about ESG investing compared with 47% last year. An even higher proportion of investors, 68%, said it’s important to make a positive social impact through their investments.

The study reveals that 74% of investors said there are companies they would not want to own because they violate their personal principles and 66% would sell the shares of a company they owned that had negative environmental or social issues.

The study indicates one challenge, however: “Such targeted investments are difficult with passive funds that own all the companies in a broad market index.” As a result, the firm says, many investors with ESG in mind are looking toward targeted investments chosen for specific criteria.

Natixis surveyed 300 Canadian investors with a minimum of $123,661 in investable assets as part of a global study in February.

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