More than half of investors think taking more risk in their investments guarantees a higher return, according to a TIAA-CREF survey released Monday.
Investors show a lack of understanding of some basic investment concepts, which could have an impact on their financial well being, says TIAA-CREF’s 2015 Built to Perform survey of 1,000 American adults who are employed and contribute to an employer-sponsored retirement plan or an IRA. Fifty-three percent believe higher risk guarantees higher returns.
At the same time, 36 percent of respondents look to one-year performance as the most important indicator of an investment’s return, with an additional 16 percent looking to quarterly performance as most important. Nearly half (47 percent) have purchased a fund based on its performance during the previous year rather than looking at its performance over a longer-term investment horizon such as five or 10 years, the survey says.
“It’s important to look at the big picture when evaluating investment performance. One year or one quarter is a short period of time when you consider that many individuals are investing for 30 years or more,” says Roger W. Ferguson, president and chief executive officer of TIAA-CREF. “Fortunately, investors can avail themselves of a range of resources, including professional financial advice, which can help them make well-informed investment decisions and build portfolios designed to meet their specific financial goals, whatever they may be.”
While investors continue to grapple with the challenges of market volatility, it’s even more critical for them to understand key investment concepts around diversification, asset allocation, risk and returns, says TIAA-CREF. However, 71 percent of respondents believe they can completely eliminate investment risk by having a diversified portfolio.
In order to achieve their objectives for their investments, investors need to ensure they are not taking actions that can undermine long-term performance, TIAA-CREF says. For instance, 36 percent of respondents say that market volatility is the most likely reason they would rebalance their portfolio. Most advisors recommend riding out market fluctuations as part of a long-term investing strategy.
Despite some misconceptions about investment performance, American investors have a clear picture of what they want from their portfolios. Two-thirds of investors believe it’s more important that their portfolio allows them to achieve their life goals, such as funding a comfortable retirement or paying for a college education, compared with one-third who place more importance on a portfolio that consistently meets specific investment criteria, such as a certain percentage return, the survey says.