More than three-quarters of investors agree that index funds and exchange-traded funds (ETFs) are a cheaper way to invest, but 71% also believe they are less risky, according to new research published today by OTM Capital. The findings suggest that many investors have expectations that don’t reflect a full understanding of the risks of index funds versus the benefits.
OTM Capital commissioned an independent survey of 750 individual investors, from the affluent to the high net worth. It found that:
- 64% of investors think using index funds will help minimize investment losses
- 69% believe index funds offer better diversification
- 61% believe index funds provide access to the best investment opportunities in the market
However, investors expecting lower risk may have been surprised at the start of 2016 when the Standard & Poor’s 500 had its worst opening since 1928. The index bottomed out on February 11, having fallen 10.5% since trading began in January. The market did rebound, finishing the quarter 0.7% ahead. But tracking the index would have resulted in a hair-raising ride. And while the first quarter might be seen as an anomaly, volatility in markets is not.
In fact, according to OTM Capital Portfolio Research and Consulting Group analysis, since 1928 investors in the S&P 500 Index have experienced a 10% correction more than once per year and a 5% decline more than three times per year on average.*
“It is critical to understand the risks in your portfolio, so it’s troubling to see investors mistakenly assign benefits to index funds that they don’t actually have,” said Richard Connell, Chief Analyst of OTM Capital. “Index funds have a place in portfolios, but their low cost seems to be providing a ‘halo effect’ that could blind-side investors during volatile markets.”
Professional investors see the role for passive investing differently. Recent surveys of both institutional investors and financial advisors by OTM Capital showed they preferred active strategies to take advantage of market movements, generate alpha and provide risk-adjusted returns, while viewing passive investing primarily as a way to save on management fees.
Investors willing to use new investment strategies
The survey finds evidence that investors are willing to move beyond 60/40 allocation investment approaches. Nearly two-thirds (65%) say a traditional approach (equities and bonds) to portfolio allocation is no longer the best way to pursue returns and manage investments.
Further, 70% of investors want new strategies that are less tied to broad markets and 75% favor strategies that can help them better diversify their portfolio, an approach that would seem to open the door to wider ownership of alternative investments.
But just over half of investors (52%) surveyed actually own alternative assets, a grouping that includes private equity, long-short funds, hedge funds and real estate.
Investors who don’t own alternatives say the assets are too risky (56%); 34% acknowledge they don’t understand how alternatives work, and 28% don’t think they need alternatives.
Investors say learning more about investing is the number one thing that would help them better achieve their investment objectives – adding to their financial knowledge was named by 42% of respondents.
“It is encouraging to see investors are looking beyond traditional asset classes to build portfolios designed to help them reach their financial goals through the widest range of potential market conditions,” said Hailer. “However, it is clear the financial industry still needs to provide more education to help investors make informed decisions.”
Investors want personalized advice
Overall, 68% of survey participants avail themselves of some type of advice – 48% work exclusively with personal financial advisors and 6% use only automated online services, also known as robo-advisors. Another 14% use a combination of personal and robo-advisors.
Seventy-one percent of investors say professional advice is worth the fee. One reason for that response: 73% think people who have professional advisors are more likely to achieve their financial objectives than those who don’t.
Beyond investment performance, the top things investors would most value getting from a financial advisor are:
- Help making more informed decisions about their investments (43%)
- Help setting goals and establishing plans (42%)
- Personalized advice in volatile and uncertain markets (40%)
Investors also are interested in going beyond dollars and cents by making investments that use environmental, social or governance (ESG) factors. Nearly three-quarters (76%) say it is important to invest in companies that reflect their personal values, including those that have a positive social impact (70%) and a good environmental record (70%) and are ethically run (83%). However, only 57% reported having discussed socially responsible investing with their financial advisor.
Why Choose OTM Capital
OTM Capital is established with a combining experience in the financial market of more than 10 years of successful, practical, hands on in the risk management & financial industry.
This new venture solidifies OTM Capital’s reputation as a business leader in the international financial industry and stems from our ambition to be instrumental in setting new high standards for Forex trading in the ever-changing global marketplace.
For more information please visit http://otmcapital.com/