The biggest risk investors now face is becoming too conservative at a time when equities present a potential long-term advantage, according to new research from MFS Investment Management.
The biggest risk investors now face is becoming too conservative at a time when equities present a potential long-term advantage, according to new research from MFS Investment Management.
In a survey of investors with at least $100,000 to invest, MFS found that 43% of the respondents reported that their risk tolerance had decreased, while just 14% said their risk tolerance has increased. Additionally, only 23% of the respondents said they were willing to take substantial risk with their portfolios, compared with 50% prior to 2008.
As a result, MFS said, investors are leaning more toward conservative bond funds and a protective strategy that has resulted in less portfolio re-balancing.
“Interest rates are at all-time lows, potentially creating inherent risks to bond investors’ principal, should rates begin to rise,” said Bill Finnegan, director of global retail marketing at MFS. “Based on this survey, coupled with Investment Company Institute flow data, it appears that investors have understood only half the equation.”
The survey found that only 37% of the self-directed investors surveyed have re-balanced their portfolios since the downturn, which compares with 44% of advised investors.
But more than 60% of the respondents said they are less than “very” confident that their assets are appropriately allocated, and 30% said the crisis has made them think that they need professional financial advice.
Despite more than $200 billion worth of net inflows into bond funds this year, compared with $18 billion worth of net outflows from equity funds, 40% of the investors surveyed agree that now is a great time to invest in the stock market.
“Clearly, investors recognize the potential benefits of keeping an appropriate portion of their portfolio in equities, but 65% of investors surveyed were very concerned about another serious drop in the stock market,” said James Swanson, MFS’ chief investment strategist.
“Based on the survey and mutual fund flow data, investors do not appear to be ready to act on that recognition,” he added. “Working with an adviser could help investors understand the risks of avoiding equities over the long term.”
On the topic of retirement, 54% of the respondents reported being more concerned than ever about being able to retire when they thought they would and 45% agree with the statement that “since the downturn, I’ve lowered my expectations about what life will be like in retirement.”
With those diminished expectations in mind, 34% reported an increase in the time and effort devoted to savings and investments.
Despite that additional effort, 44% said they had no idea how much money they will need to retire. In addition, more than a fifth of the pre-retiree baby boomers decreased their retirement contributions during the recession.
“Boomers nearing retirement are not helping their long-term financial security by scaling back contributions now,” said Mr. Finnegan. “The benefits of dollar-cost-averaging and the power of compounding over time may be eroded by remaining overly focused on protecting principal.”
