Risk and asset allocation misperceptions
Not surprisingly, three times as many report that their risk tolerance has decreased (43%) as increased (14%) and 36% say their investment objective is protecting principal/not losing money, vs. 14% before the economic downturn. Investors are exhibiting this behavior at a time when investing in equities could be to their potential long-term advantage. Before the downturn, 50% were generally willing to take substantial risk for substantial returns; today, it's 23%.
What is surprising is that while investors have become more protective of their assets, only 37% have rebalanced their portfolio, (44% of advised investors have rebalanced). Further confounding, 68% claim to be making decisions the way they want (on their own or with some minimal input from an advisor). But more than 60% are less than ‘very’ confident that their assets are appropriately allocated, and the crisis has only caused 30% of those surveyed to feel like they need to seek professional financial advice.
"A majority report they are comfortable with the way they make their investment decisions, but almost the same percent also report that they don't think their assets are appropriately allocated," Finnegan said. "Furthermore, less than four in ten have rebalanced their portfolios since the downturn – this type of behavior speaks to a need for many investors to be working with a financial advisor to develop a disciplined asset allocation strategy."
Furthermore, despite flows to bonds, 40% of all investors surveyed agree strongly/somewhat that now is a great time to invest in the stock market (25% disagree strongly/somewhat) and 38% disagree strongly/somewhat that government bonds are the best place to put their money right now.
"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," added 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 – working with an advisor could help investors understand the risks of avoiding equities over the long term."
Retirement Readiness Challenged
Fifty four percent reported being more concerned than ever about being able to retire when they thought and 45% agree or strongly agree with the statement that "since the downturn, I've lowered my expectations about what life will be like in retirement." With diminished expectations in mind, however, 34% claim a net increase in time/effort devoted to savings and investments since the downturn.
Despite the additional time spent on savings and investing following the economic downturn, 44% said they had no idea how much money they will need to retire. In addition, more than a fifth of non-retired Boomers have decreased their retirement contributions during the recession.
"Boomers nearing retirement are not helping their long term financial security by scaling back contributions now," Finnegan said. "The benefits of dollar cost averaging and the power of compounding over time may be eroded by remaining overly focused on protecting principal. When inflation returns, those who have scaled back contributions may be even further challenged to keep pace."
When asked what action they were most likely to take to increase their chance of meeting their retirement goal, one third said they would put off retirement. Less than one fifth were willing to increase contributions to a tax deferred retirement account and even fewer (15%) would choose to save more outside of a tax deferred retirement account. Further, only 4% said they would shift their portfolio to more high risk holdings (e.g., equities or equity mutual funds).
"Advisors have an opportunity to remind investors about the power of compounding dividend yields over time," added Swanson. "Many investors focus on stock price appreciation, however, they should remember that approximately half of investors' long term total returns from equities are driven by compounding dividends over time."
