Risk-Aversion, Low Interest Rates Threaten Long-Term Investing

Half of investors (52%) say stock market volatility, rather than continued low interest rates (38%), is the greater threat to their portfolio over the long-term, according to the Wells Fargo/Gallup Investor and Retirement Optimism Index.

Non-retirees are especially likely to say stock market volatility is the greater source of concern (57%), versus 34% who are more concerned about low rates. On the other hand, 47% of retirees feel continued low interest rates are a greater problem, versus 41% of retirees who fear market volatility over low rates.

When investors were asked to choose whether low interest rates or high interest rates are better for their own financial situation today, 63% of all surveyed say they prefer low interest rates, and this surges to 71% of non-retirees. However, this is not the case for retirees, of whom 41% said they prefer low rates. One-third of all investors said they prefer high interest rates.

“Most people who are not yet retired have a consumer mindset when they consider the benefit of low rates because they like their loans to cost less. However, people must also consider the impact of low rates on long-term investing. The way to navigate through low rates as an investor is to build a diversified portfolio that has the potential to sustain itself through volatility and the challenges of a low-rate environment,” says George Rusnak, co-head of global fixed income strategy for Wells Fargo Investment Institute.

When the survey asked investors what happens to bond prices when interest rates go down, more than half (54%) admit they don’t know. Only 22% correctly identified the inverse relationship whereby bond prices typically go up when interest rates go down. Another 17% think the two move in the same direction.

“This prolonged low-interest-rate environment highlights how beneficial it is for investors to understand the mechanics of bonds and how they play a part in long-term growth opportunities,” says Rusnak.

According to the survey, 43% of investors say they have moved their money to cash or cash equivalent savings over the past year—far more than those moving money to stocks or bonds. Following movement to cash, 29% say they moved money to stocks or mutual funds in the last year, while 20% say they moved money to “other investments.” Fewer investors (13%) have moved money to CDs or money market accounts, and 10% have moved money to bonds.

Investors are clear about their aversion to risk with 59% saying they are only willing to take on “a little risk” (44%) or “no risk at all” (15%). About 40% say they are willing to take on “a lot of risk” (5%) or a “fair amount” (35%) of risk.

“While investors are concerned about market volatility and taking on risk, people actually run the risk of being complacent as they avoid potential stock market risk. Market avoidance may not allow people the chance to grow their money over time,” says Rusnak.

According to the study, the average annual rate of return investors expect to realize on their investments this year is 7%. This is in line with the performance of a globally diversified portfolio, which has been up about 7% so far in 2016. However, nearly one in five investors (18%) think they will earn more than 10% on their investments this year. Wells Fargo Investment Institute forecasts most returns to be below historical averages in this environment.

The survey asked investors how their savings and investments are currently allocated. Respondents report having an average of 35% of their savings and investments in stocks or stock mutual funds and 10% in bonds or bond funds. Investors also revealed they have an average of 19% in cash savings and 11% in CDs or money market accounts—allocations that are earning little to no interest. An additional 12% of investors’ portfolios are in “other investments,” which could include real estate, gold or other commodities and alternative investments.

This quarter, the survey asked retirees about their approach to managing their retirement savings and investments. Four in 10 retired investors (42%) say they are carefully spending down their retirement savings so it lasts as long as they need it. A similar proportion (38%) is trying to keep their nest egg intact but living off the interest as well as Social Security. Meanwhile, just 16% of retirees are in a position to increase what they have saved for retirement. Three-quarters of retirees (76%) are confident they can maintain their chosen approach throughout their retirement.

“Achieving a consistent and solid rate of return on investments is critical for retirees to stick with their financial goals. Having a diversified portfolio through market volatility and low interest rates may help accomplish this,” Rusnak says.