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Originally published Saturday, May 17, 2014 at 8:01 PM

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Investors hurt themselves as much as the market does

Getting high returns while taking minimal risk is a pipe dream; if asset growth is your priority, taking risks is crucial.


Syndicated columnist

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Your Funds

Investing is about trade-offs; you simply can’t have it all.

So if you need to make 10 percent above inflation to meet your future needs, but you are only willing to assume minimal investment risk in an attempt to generate those gains, something has got to give.

That give and take — the push and pull of emotions — is inevitable, but a study recently released by Natixis Global Asset Management suggests that investors aren’t particularly accepting of those compromises, and instead are living in a world of unrealistic expectations and conflicting sentiments, leaving them hoping impractically that events will work out their way because they see no other route to success.

Meanwhile, their behaviors reduce the chance that they get the best possible outcome, often because their actions are based on “gut instinct,” which is a good way to develop trust in the moves you are making but not necessarily the best way to decide which financial steps to take.

If you are a mutual-fund investor trying to figure out how to reach your goals, examining the Natixis study and seeing how the investment public makes moves that feel benign, but wind up dangerous could be a wake-up call.

If the average investor’s behavior is incongruous, but you see the same characteristics in yourself, it’s time for a change.

Let’s dig in to the survey.

Americans said they need to earn average annual gains of 9.8 percent above inflation to make their financial needs.

Natixis officials noted that inflation since 1964 has averaged 4.2 percent annually, which means the average American has to generate 14 percent to meet his or her needs.

The Standard & Poor’s 500 index has an annualized average gain of 10 percent over the last 50 years, meaning it’s unlikely most investors actually achieved their need level in the past; they have little reason to expect to hit the target going forward, even if inflation stays very low for the foreseeable future.

Similarly, more than 70 percent of investors said they would prioritize asset growth over principal protection, but 56 percent say they are only willing to take minimal risk to achieve high returns.

“When people are looking out, they are saying ‘Boy, I have to get pretty hefty returns to be able to meet those goals,’ ” said David Giunta, president and CEO at Natixis Global Asset Management.

“But we know that investors have been through a tough time over the last 12 years — living through two significant downturns — they’re saying, ‘I know I have to get those type of returns, but I am very worried about the volatility in the market and I don’t know if I can stand that, so I may want to go for it, but I don’t want to risk losing my principal at the same time.’ ”

Getting high returns while taking minimal risk is a pipe dream; if asset growth is your priority, taking risk is crucial.

Likewise, three-quarters of investors told Natixis they only own investments they understand well, which makes sense until you hear that just one-quarter of all investors surveyed felt their overall investment knowledge was particularly strong.

If they’re not relying on investment knowledge, investors are playing the market the way most people bet at the track or in the casino, by playing hunches.

Nearly 80 percent of investors surveyed by Natixis said they simply follow their gut instinct.

That’s not financial planning.

Countless studies show that whether it’s your gut or your heart, emotions cloud judgment, with typical investors waiting too long for an uptrend to “prove” that it’s time to buy, then bailing when a downturn “verifies” that fortunes have turned.

That’s why most investors buy high and sell low, even when that’s clearly not their intention.

You may not want to pay for financial guidance, but it’s a bit like hiring an auto mechanic or a plumber; if you don’t have the ability or know-how to care for your car or to fix a household leak, you bring in assistance and find that it’s short money if the job gets done right.

In the end, perhaps the most important questions that Natixis asked involved what investors would do if their nest egg winds up being insufficient.

Nearly half of the respondents said they would continue working, and nearly a third would rely on support from family members.

If that’s not the outcome you want, it’s time to act and invest like it.

You can take few risks — if that’s all you can get comfortable with — provided you save more.

You can trust your gut — rather than an adviser — provided you’ve learned enough to build a plan that not only minimizes indigestion but gives you a realistic chance of reaching your goals.

Hope and necessity won’t make your financial dreams come true.

If you are expecting things to work out for you “because that’s what has to happen,” trade some blind optimism for a dose of realism; the one standing between you and your goals is you.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.

Copyright 2014, MarketWatch



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