A Franklin Templeton Investments survey conducted by The Wall Street Journal (WSJ) in December 2013 found that 83 per cent of investors believe risk management is the most important consideration in choosing investments.
More than half (57 per cent) also said that losing less than the market during a downturn is important to them.
“For many investors, events – such as the financial crisis of 2008 – have highlighted the importance of reducing downside exposure,” says Philip Bensen, head of National Sales – Canada at Franklin Templeton Investments.
As the outsized baby boom generation moves into retirement, there is also increasing awareness that market volatility is more damaging to investors who rely on their portfolios for income. “Volatility can hurt – the return that’s required to recoup a portfolio loss is obviously greater than the original loss,” says Mr. Bensen. “But if you take retirement income of five per cent into consideration, an investor would need to achieve a 44 per cent cumulative return over five years in order to recoup a loss of 10 per cent.”
In addition to limiting downside risk, professional management combined with professional advice can also help take the emotion out of investment decision-making – emotion that may otherwise lead to regret and underperformance. “Many studies, over a long period, have shown that investors tend to buy high and sell low when not working with a financial advisor,” he points out.
The most recent DALBAR annual study of investor behaviour found that in the 20 years ending December 2013, the average annual return of U.S. investors was five per cent – lagging the S&P 500 by four per cent.
“Companies like ours take an effective, focused view of risk management. With experience developed over a long period – in our case, over 60 years – we can help investors get through those periods where emotions can be their worst enemy,” says Mr. Bensen.
Seventy-six per cent of WSJ survey respondents also said they felt it is important to invest in products that outperform the overall stock market. “With active management, you get diversification, risk management and expertise in areas where it’s simply impossible for investors to do it on their own. We have offices in over 35 countries with more than 600 investment professionals around the world – that is a level of expertise that is difficult if not impossible to duplicate.”
Passively managed investments can complement actively managed investments in a portfolio, says Mr. Bensen. “We believe the question shouldn’t be ‘active versus passive,’ but rather ‘active and passive’ depending on what’s best for the investor.”