MFS: Risk aversion is the biggest risk investors face

The biggest risk investors face is becoming too conservative at a time when equities present a potential long-term advantage, according to new research from MFS Investment Management.

In a survey of investors with at least $100,000 to invest, MFS found that 43% of the respondents reported that their risk tolerance has decreased, while just 14% said that their risk tolerance has increased. Additionally, just 23% of the respondents said that they are willing to take substantial risk with their portfolios, compared with 50% prior to 2008.

As a result, MFS said, investors are leaning more toward conservative bond funds and a protective strategy that has resulted in less portfolio re-balancing.

“Interest rates are at all-time lows, potentially creating inherent risks to bond investors’ principal, should rates begin to rise,” said Bill Finnegan, director of global retail marketing at MFS.

The survey found that just 37% of the self-directed investors surveyed have re-balanced their portfolios since the downturn, which compares with 44% of advised investors.

But more than 60% of the respondents said that they are less than “very” confident that their assets are appropriately allocated, and 30% said that the crisis has made them think that they need professional financial advice.

Despite more than $200 billion worth of net inflows into bond funds this year, compared with $18 billion worth of net outflows from equity funds, 40% of the investors surveyed agreed that now is a great time to invest in the stock market.

“Clearly, investors recognize the potential benefits of keeping an appropriate portion of their portfolio in equities, but 65% of investors surveyed were very concerned about another serious drop in the stock market,” said James Swanson, MFS’ chief investment strategist. “Working with an adviser could help investors understand the risks of avoiding equities over the long term.”

In terms of retirement, 54% of respondents reported being more concerned than ever about being able to retire when they thought they would, and 45% agreed with the statement: “Since the downturn, I’ve lowered my expectations about what life will be like in retirement.”

With those diminished expectations in mind, 34% reported an increase in the time and effort devoted to savings and investments.

Despite that additional effort, 44% said that they have no idea how much money they will need to retire. And more than a fifth of the pre-retiree baby boomers cut their retirement contributions during the recession.

“Boomers nearing retirement are not helping their long-term financial security by scaling back contributions now,” Mr. Finnegan said.

E-mail Jeff Benjamin at [email protected].