That nearly half of American investors fear losing money due to market volatility underscores the need for investors to build durable and diversified portfolios, according to an investor survey by asset manager firm Natixis Global Asset Management.
Natixis' U.S. Investor Insights Survey found that nearly 47% of investors worry about losing money due to market volatility, potentially limiting what they invest in the market. Yet a significant portion of investors--about four in ten--aren't interested in alternative products and strategies that could potentially diversify portfolio returns.??
"At the end of the day, investors know they need to invest, but they are searching for ways to protect their principal," said John Hailer, president and CEO of Natixis Global Asset Management of U.S. & Asia. "They need better tools to manage risk and lessen volatility."
Hailer, who outlined Natixis' survey results at a news conference in New York last week, said the survey results shows how hard the market volatility of the past decade has hit investors, and underscores how hard the financial services industry needs to educate investors about ways to diversify their portfolio by including alternatives exposure.
Natixis' survey was conducted by CoreData Research and surveyed 463 American adults to better understand their attitudes, behavior and sentiment in today's investment environment. Two surveys were conducted in May and July 2011.
Hailer said that portfolio construction now demands a broader set of tools to better manage risk that move beyond traditional cash, bonds and long-only investing to strategies to include active management and products such as alternative investments that limit volatility or provide returns uncorrelated to the markets.
"We need to think of an investment portfolio as something that holds up in all kinds of investment climates," Hailer added. "We value durable cars and durable furniture. We also should value durable investment portfolios."
The need for durable portfolios is accentuated by other findings of the U.S. Investor Insights Survey, which found that three years after the financial crisis 80% of investors believe the crisis continues to change the investment landscape and 66% said they have changed their expectations about future investment returns.
Hailer said the survey also shows that while investors recognize the importance of understanding risk and diversification, few understand alternative investments, which can help stabilize a portfolio and diversify returns throughout periods of market turbulence.
Only half (49%) of U.S. investors said they understood their portfolio's risk "moderately" or "very well," compared to only a small percentage of investors (4%) who said they don't. Seven in 10 said they understood alternative investments "only a little" or "not well at all," and only one in 25 said they understood them "very well." More than half (53%) say they don't understand how they work, and more than 40% even admit to having no idea of what alternatives are.
Even among high-net-worth investors, who compose the bulk of those eligible to invest in many alternative products, just 7% say they understand alternatives "very well," and one in three (36.5%) say they don't understand these instruments. The Natixis survey also indicates that a majority of investors (63%) say they will invest only in products with which they are familiar, and two-thirds (69%) say they need to learn more about alternatives before investing in them.
Hailer said that despite a growing acceptance of the need for smarter portfolio construction, widespread fears about the markets have left a huge void for someone to explain these products and restore confidence.
"Investors need trusted guidance from financial advisors who can explain why alternative investments can be a key tool in building durable portfolios and how they can act as natural shock absorbers to market volatility," Hailer said.