Are Canadian investors too cautious?

Canadian investors are different from others around the world. Investors here tend to be more risk averse and more likely to look for safer investment choices (see chart below).

In fact, when asked what kind of investor they are, 79% of Canadians classified themselves as “cautious” and another 84% also told us that if they were forced to choose, they would take safety over investment performance.

This cautious approach can often be good for clients, helping them gain more perspective on events and what it means for their investments. But are Canadians too cautious?

Too much caution can mean:

• their judgment about investment risk may be clouded;
• they may underestimate their retirement income needs;
• they may not be setting clear financial goals.

We’ll explore each issue.

Source: MIT/Natixis: based on findings from the Natixis Global Asset Management 2015 Global Survey of Individual Investors. The risk-aversion coefficient measures investor appetite for risk. Investors with higher aversion are generally less willing to take risk and prefer safer investments.

• Missing the risks of index investments

Despite their conservative investment views, Canadians may underestimate important risks. For example, many overestimate the safety of index funds. More than half (58%) of investors believe index investments are less risky and 64% think these funds will help them minimize losses. These statements aren’t necessarily true. Passive investments have no built-in risk management and this false sense of security can leave clients exposed to significant risk.

So it’s important to make sure your clients understand the physics of indexing: yes, index funds may give you market gains when markets are up, but you’re also exposed to losses when markets are down. While the need to discuss risk may be clear when clients want to buy into high-flying markets, it can be counterintuitive to put risk on the table when clients think they are making a cautious choice. Setting out the full picture will help them make more-informed decisions about their investments.

• Underestimating retirement needs

An overly conservative view may also hurt clients’ retirement plans. On average, Canadians say they save about 10.5% of annual income toward retirement – less than the global average of 12.1%. One reason for lower savings could be that Canadians underestimate their retirement income needs.

Those we surveyed believe they’ll need to replace 59.6% of current income to live comfortably in retirement. While this amount trails the global average by only a few percentage points, it is considerably less than the 75% to 80% replacement rate many experts recommend.

In terms of retirement, longevity should be the key risk to cover with clients. An income replacement goal is only part of the equation. The real challenge is determining how long they’ll need to generate that income. Helping clients define this variable in realistic terms will determine a more accurate plan for retirement savings.

• Lacking goals and a plan One of the biggest challenges facing investors in Canada is that many lack a solid foundation for financial decisions. Almost half of those we spoke with (49%) say they have no financial goals; even more (57%) have no financial plans.

Covering these basics may help cautious investors the most, giving them a basis for evaluating risk. We see more advisors globally making goals the basis of client meetings. It helps set context for portfolio performance and establish a realistic measure of performance independent of market noise.

Ultimately, reframing the discussion on goals helps take the emphasis off market spikes and places it on what clients really need to accomplish – funding retirement, covering education costs, or building wealth.

How to help Investors value professional advice. But they have specific views on the kind of help they want. When asked what they want from an advisor, Canadians say they’d like help setting goals and establishing plans. They also want help making more informed investment decisions. And they desire better solutions for managing risk.

After a tumultuous run in the markets, now may be the best time to check in with clients to ensure these basic concerns have been addressed. A good dose of caution can be an asset in uncertain times. Too much of a good thing could keep clients from reaching their biggest long-term goals.

David Goodsell is executive director of the Natixis Global Asset Management Durable Portfolio Construction Research Center.