The misconception that passive investments are lower risk, a misalignment between return expectations and risk tolerance, and a lack of clear financial goals are all issues that are still impacting many investors’ portfolios, according to the latest survey from Natixis. 
The asset management firm’s global Individual Investor survey, which is published annually, has found that a majority of investors are confused about how to maximise the performance of their portfolios based on their individual requirements.
The report points out that panic-inducing levels of market volatility, combined with the ability to check short-term performance numbers easily, could be the reason why there has been so much confusion among individual investors over the last year.
An example of such confusion, according to the survey, is that out of 7,100 respondents across 22 countries that have invested at least $200,000 (£136,000) in their portfolios, 60 per cent believe index funds to be lower risk than active funds and 61 per cent believe that index funds offer better diversification.
A further 60 per cent think passive funds minimise losses and 55 per cent believe they help investors to access the best investment opportunities.
“Views expressed by individuals in our 2016 survey conflict directly with those offered by investment professionals,” the team at Natixis said.
“Institutional decision makers and financial advisors agree that passive strategies have a fee advantage, but they do not express the same confidence about other investment benefits in our most recent surveys.”
The report said the belief that passive strategies are less risky is “the most troublesome” and argues that there is a lack of risk management when it comes to trackers because they will move simultaneously with markets whether they rise or plummet.
“While investor demand for these lower-fee products may be strong, it is important that investors see the full picture of how they fit into a comprehensive portfolio strategy,” it added.
Another area of investing that tends to cause confusion for investors, according to Natixis, is the battle between how much return investors are looking for and their appetite for risk.
For instance, the average return above inflation that survey participants would like to see is 9.5 per cent per annum, which in real terms is equivalent to between 12 and 13 per cent.
“While this may be seen as an overly optimistic estimate by professional investors, more than six in 10 investors surprisingly believe they can actually achieve their expected returns over the long term,” the report said.
“Unfortunately, they may not be ready to take on the risk associated with pursuing such high levels of return.”
Out of the 7,100 retail respondents, 35 per cent see risk as permanent loss of capital, 20 per cent see risk as underperforming the market, 16 per cent say it is exposing assets to volatility and 8 per cent see risk as missing out on potential returns.
This data, according to Natixis, simply doesn’t correlate with the high levels of returns that investors are looking to achieve from their portfolios.
“These do not sound like the views of an investor who is likely to endure the potential volatility that comes hand-in-hand with the pursuit of double-digit returns. One reason for this significant conflict may be that large numbers of investors lack fundamental tools to help guide their investment decisions,” the team continued.
That said, survey participants managed to achieve an average total return of 5.8 per cent in 2015 on an annualised basis, compared to the MSCI AC World’s return of 3.29 per cent.
Performance of index in 2015
Source: FE Analytics
While this isn’t perhaps the double-digit returns that many investors had been hoping for, Natixis says that those questioned were still “surprisingly disciplined and lucky” to make this return, given the incongruity between their risk appetite versus their desired total returns and given the choppy sideways market conditions.
While Natixis says this average return was plausible for those who invested in Europe, it argues that US investors may not have fared so well – according to the firm’s Portfolio Clarity Service (which conducts adviser portfolio analysis), the average US moderate risk portfolio lost 0.92 per cent in 2015 compared to the S&P 500’s return of 1.38 per cent.
“Even in cases where investor estimates are accurate, expectations were not met and only 18 per cent of respondents worldwide claim they were satisfied with their results,” the report added.
A third concern that the survey highlights is that people are investing without setting themselves goals, which the firm says serve as a good basis for investment decisions.
Half of those surveyed have no set financial goals throughout 2015 and more than 60 per cent have no financial plans, which Natixis says could lead to a lack of grounding needed to make sensible investment decisions.
“Adding to the challenge are the 56 per cent of individuals who say they struggle to avoid emotional decisions when markets are volatile,” the team said.
“Misinformation, confusion and conflicts abound. Inundated with market information, short-term performance numbers and proclamations about the right way to invest, individual investors are challenged to separate fact from fiction.”
