Investors are more worried about inflation over the coming year than their advisors, leading to a big disconnect, according to a new survey.
Sixty percent of investors surveyed by
This disconnect is especially apparent in talking to younger investors, the survey found. Nearly three-quarters of all investors, 72%, said sheltering their portfolio from inflation was important to them, but the numbers skewed towards the younger set. About 74% of Generation Y wanted to inflation-proof their portfolio, whereas 69% of Generation X held that as a goal.
By comparison, financial advisors were downright sanguine. Just 34% were personally concerned with inflation over the coming year. More than half, 56%, said protecting clients’ portfolios from inflation was an important issue for them in the coming year, but just 12% rated it the top priority.
In a further disconnect, 78% of advisors believed their clients were worried about another major slump in stocks. But only 53% of clients actually reported that concern to the survey.
But across the age groups, 69% of investors said more sophisticated investment strategies were needed to cope with today’s whipsaw markets.
For the clearest picture of investors’ worries, just look at their portfolios: on average more than a quarter, 26%, is in cash.
But advisors should formulate their strategy before rushing to tell clients to let some air out of that cash cushion and jump back into the markets.
“That’s not what this is about,” Finnegan said.
Instead, he suggests advisors use the inflation figures to start a conversation with clients about their concerns, and ask why they think the big cash position will help them. “Say ‘tell me what you’re worried about,’” Finnegan said.
Finnegan then advises explaining to clients exactly what their cash is earning for them they will likely believe it is earning much more than it is. Respondents to the survey across all age ranges believed they were earning rates around 2007 levels, Finnegan said, back when the effective Fed Funds rates was 4.2%. Now, with that rate around 0.1%, and inflation at 3%, investors are losing about 2.9% per year with cash.
Only after clients understand the real picture, Finnegan said, should advisors proceed to the next step.
“If they too quickly introduce the notion of stock investing, the investor will still be saying, ‘I’m very nervous.’ They have not returned to their
Finnegan’s tips include easing clients into the idea of heading back to markets with conservative equity products, bond products, or asset allocation funds. He stresses products that broaden the client¹s exposure to equity markets without being particularly risky.
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