High-net-worth investors take a moderate approach to risk over next 12 months

Stock market of Brussels

Stock market of Brussels (Photo credit: Wikipedia)

According to the 2013 Investor Mindset Survey, high-net-worth investors will begin to make a decisive shift in their portfolios over the next 12 months with 24 percent planning to invest more in equities over the next year versus only 10 percent for bonds.

Investors have been cautious since the market events of 2008, but the survey may signal the end of this cautious approach as nearly four times as many high-net-worth investors plan to add equity and strategies balanced between equities and fixed income to their portfolios as compared to bonds. In addition to investors, the survey indicates that advisors are even more likely than investors to be focused on equities as their recommended approach over the next year.

Although a key driver for both high-net-worth investors and advisors is a desire for consistent income, which historically meant a focus on bonds, surprisingly, 48 percent of investors chose equity and balanced strategies as “top of mind” when thinking of income, while only 30 percent of investors chose bonds.

This new willingness to try a more balanced approach is reflected in investors’ responses when asked to describe their investment style. An overwhelming 84 percent of investors described themselves as having a “balanced” or “progressive” risk appetite—a moderate approach to risk. Yet a third of advisors described their clients as being “secure” or “cautious” in their risk appetite, while only 9 percent of investors described themselves this way.

“Few surveys take such an in-depth look at the same questions from the perspective of both investors and advisors,” said Linda Duessel, senior equity strategist at Federated Investors. “We wanted to find where advisors and their clients are united and where they differ. The study provides compelling new evidence that the much-anticipated ‘Great Rotation’ has begun to take place, though it has been slow to materialize.”

With the financial meltdown still weighing on their psyches, investors cited low investment returns in their personal portfolios as a concern, but they were optimistic about the prospects for the U.S. economy with 56 percent of investors and 68 percent of advisors expecting the U.S. economy to improve over the next 12 months.

“Investors are concerned about low returns and appear to be ready to make a change as long as it’s not too risky,” said Duessel. “They are shifting from a state of extreme caution to a willingness to make calculated changes—moving away from low-yield fixed-income products to equities, balanced and even higher-yielding bonds. This rotation or move may satisfy investors’ need for a more reliable source of income and is also a smart approach to consider for pursuing a secure retirement.”

While investors are pessimistic about short-term portfolio prospects, they are surprisingly sanguine about longer-term retirement risks, according to the survey. Only a small percentage of investors say they are seriously concerned about their ability to meet retirement goals. However, advisors believe their clients to be much more worried.

Less than 10 percent of investors interviewed said they were very concerned about meeting retirement goals or outliving their assets, while nearly a third of advisors said they thought their clients were very concerned about those issues.

“Our study indicates advisors focus on long-term issues, such as longevity risk, while investors consider shorter-term trends such as low returns,” said Duessel. “Advisors play a central role in bridging this gap and educating investors about a very real risk they are underestimating. A reliable source of income is an important part of the retirement income solution and our survey indicates investors are open to equity and balanced income products to help ensure a secure retirement. In fact, 65 percent of investors say a positive effect on retirement is the most important aspect of income products.”

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