What is the greatest danger for investments today? I can forgive you for answering volatile markets and economic growth. In reality, however, it is the investor himself.
The modern investor isn't just anxious. He is deeply conflicted. Our recent research conducted on Italian and global investors shows how deep this conflict runs. In fact, savers declare that they want their assets to grow, but do not want to take risks. They value passive investments for their low costs, but then believe they have less risk. They intend to measure the performance of their investments based on personal goals, but then admit they have none. They understand that they will have to take more responsibility for their own retirement, but underestimate the costs involved. And the list goes on.
How important is all of this? Leaving these knots unresolved reduces the ability to save and invest and prevents savers from acting today in such a way as to provide for a stable and serene tomorrow.
Cautious, but looking for double-digit returns
The majority of the Italian savers interviewed define themselves as "prudent". At the same time it says it needs average returns of 9,9% above inflation to achieve its goals – which in the current environment would expose them to significant volatility. Not many seem to tolerate risk well: 82% of Italians, in fact, would prefer safety over performance. What investors need, then, is better education about the concept of risk and guidance in understanding how much of it they can truly tolerate.
Sees “low cost” and thinks “less risk”
When it comes to passive or index investing, a surprising number of investors think that lower costs mean less risk. Six out of ten Italian investors consider passive instruments less risky and useful for minimizing losses. But by their nature, passive funds lack risk management.
When markets go up, they generate returns, when markets go down, they incur losses. Passive strategies have a clear place in portfolios – alongside active investments – but investors need to understand the characteristics of various products. Professional investors do. Our annual research on institutional investors shows just how institutional investors embrace passive instruments to keep overheads low, while turning to active management for returns and risk management.
Goal oriented, but without having them clear
Seven out of ten Italian investors ask to evaluate the performance of their investments on the basis of their personal goals. But that seems unlikely if only 58% have well-defined financial goals and even fewer, 33% have a clear financial plan. The first step, therefore, for every investor must be to clearly define specific objectives and work with a financial advisor who can help him build a realistic plan to be able to achieve them.
He understands the pension issue, but underestimates what is needed
Italians are aware that the responsibility for their post-retirement financial security is shifting more and more onto their shoulders. On average, Italian investors report that they need 71% of their pre-retirement income to be able to live on in retirement. This figure is positioned in the low end of that range identified between 70% and 80% generally recommended. Savers must consider life extension and longevity as the greatest risk. Defining how much to save starts with a calculation of how long they will live after retirement.
Investors therefore still have many kinks to sort out, but the good news is that they now recognize the value of professional advice. The majority say that the advice is worth paying a fee and two-thirds believe that those who get advice are more likely to achieve their financial goals. Investors today have a clear vision of what they want from a financial advisor: they want to be more informed, they want solutions to manage risks, they want to define goals and plans to achieve them. Savers therefore want a different and more collaborative relationship with their advisors.
One in two savers thinks that the investment industry doesn't put their interests first. If we want to rebuild that trust, we need to sit next to the investor on the same side of the table. We need to put risk at the heart of the discussion to help them understand what they can realistically expect from their investments. We need to stop talking about products and start talking about personal portfolios defined on the basis of your specific goals. We need to inform investors more and better. It is our responsibility to help them make more informed and informed investment decisions for their financial future.
