(C) Sam Burt 2010

((C) Sam Burt 2010)

Investors Confident of Future, But Are They Overconfident?

Hedge Funds

The stock market has taken some recent hits, but it has continued to avoid the bear market that everybody fears. From 2005 to 2014, the S&P 500 has gained an average of 9.5% with reinvested returns included, and that covers the time period of the Great Recession. No wonder that people expect it to go on indefinitely.

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That may be overstating things, a bit, but the relatively sunny conclusion of a recent survey by Natixis Global Asset Management indicates that investors think that good times will prevail — or at least that a market crash is too unpleasant to even consider. Although survey respondents fear a market correction, they think that there is little they can do about it, thus they forge ahead as if good times were guaranteed.

John Hailer, CEO of Natixis for Asia and the Americas, put it this way: "American investors have gotten used to excellent stock market returns in the last few years, so their view of financial markets is notably positive" and " the missing piece is that many have not really planned, or prepared themselves emotionally, for another market setback."

Optimism is certainly rampant in the survey population of 750 investors. 82% of respondents were satisfied with their gains of the previous year, 81% considered double-digit returns for the upcoming year to be realistic, and 54% expect their portfolios to outperform 2014 — hard to do when the S&P rose by 13% in 2014.

Keep in mind that the survey was conducted in February 2015, and given the Greek crisis and other current events as of the end of June 2015, the results would likely be different today — although we suspect optimism would still carry the day.

There is one other dangerous ratio that the survey identified — the willingness to take risks compared to financial planning, or at least the ability to follow through on planning.

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Just over half of the respondents were willing to increase their exposure to financial risk, 68% say that traditional investment approaches with stocks and bonds are inadequate, and 55% invest in riskier alternate asset categories such as hedge funds and commodities.

On the planning side, investors appear to understand the value of advice and risk management, yet often ignore it or do not follow through. Wide majorities of respondents believe that professional advice is important for financial decision making (87%), want strategies that provide a better risk/return balance (83%), and want their portfolios to be better protected against market swings (73%). Yet, only 49% of respondents have financial plans in place, including only 55% of those who work with advisors. Why seek out a guru’s guidance if you are not going to follow it?

A separate voice in planning can help prevent emotional reactions to market and world conditions. Investors believe that reactions from a global economic slowdown or US politics could throttle their financial goals in 2015, at a rate of 43% and 50% respectively. Meanwhile, 65% of respondents find it hard to avoid emotional decisions during a market shock.

The collective optimism extends to retirement, with a 63% majority acknowledging the shift from businesses to individuals in retirement planning. They believe that over half (55%) of retirement funds will come from their own efforts instead of Social Security and other assistance programs. Even so, 88% of respondents expect to meet retirement goals.

A summary of the survey results may be found on the Natixis website here. We could all use a little optimism — just do not forget about and abandon financial advice, proper planning, and risk management.

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