More than three-quarters of investors agree that index funds and exchange-traded funds (ETFs) are a cheaper way to invest, but 71% also believe they are less risky, according to new research by Natixis Global Asset Management. The findings suggest that many investors have expectations that don't reflect a full understanding of the risks of index funds versus the benefits.

Natixis' independent survey of 750 individual investors in the US, from the affluent to the high net worth, found that 64% of investors think using index funds will help minimize investment losses; 69% believe index funds offer better diversification; and 61% believe index funds provide access to the best investment opportunities in the market.

However, investors expecting lower risk may have been surprised at the start of 2016 when the S&P 500 had its worst opening since 1928. The index bottomed out on February 11, having fallen 10.5% since trading began in January. The market did rebound, finishing the quarter 0.7% ahead. But tracking the index would have resulted in a hair-raising ride. And while the first quarter might be seen as an anomaly, volatility in markets is not, states the survey report.

In fact, according to a Natixis Portfolio Research and Consulting Group analysis, since 1928 investors in the S&P 500 Index have experienced a 10% correction more than once per year and a 5% decline more than three times per year on average (Source: Natixis Portfolio Clarity Trends Report, Winter 2016). Natixis Portfolio Research and Consulting Group's team (25 in Boston and 11 in London) offers advice to retail and institutional investors on securities, structured products, derivatives, currencies, ETF and competitor funds to Natixis Global Asset Management's clients, independent of the services offered by the sales and fund management teams of the company's affiliated asset managers.

According to John Hailer (pictured), chief executive of Natixis Global Asset Management for the Americas and Asia, it is critical to understand the risks in your portfolio, "so it's troubling to see investors mistakenly assign benefits to index funds that they don't actually have". "Index funds have a place in portfolios, but their low cost seems to be providing a 'halo effect' that could blind-side investors during volatile markets," said Hailer in the report.

Professional investors see the role for passive investing differently. Recent surveys of both institutional investors and financial advisors by Natixis showed they preferred active strategies to take advantage of market movements, generate alpha and provide risk-adjusted returns, while viewing passive investing primarily as a way to save on management fees.

The survey also found that investors are willing to move beyond 60/40 allocation investment approaches. Nearly two-thirds (65%) say a traditional approach (equities and bonds) to portfolio allocation is no longer the best way to pursue returns and manage investments.

Additionally, 70% of investors want new strategies that are less tied to broad markets and 75% favour strategies that can help them better diversify their portfolio, an approach that would seem to open the door to wider ownership of alternative investments. However, just over half of investors (52%) surveyed actually own alternative assets, a grouping that includes private equity, long-short funds, hedge funds and real estate.

Investors who don't own alternatives say the assets are too risky (56%); 34% acknowledge they don't understand how alternatives work, and 28% don't think they need alternatives. According to the survey, investors say learning more about investing is the number one thing that would help them better achieve their investment objectives - adding to their financial knowledge was named by 42% of respondents.

"It is encouraging to see investors are looking beyond traditional asset classes to build portfolios designed to help them reach their financial goals through the widest range of potential market conditions," said Hailer. "However, it is clear the financial industry still needs to provide more education to help investors make informed decisions."

Outside events, including the outcome of the US presidential election, could cause volatility in financial markets over the next 12 months, investors say. They identify the leading financial threats in that time as global economic slowdown - identified by 41% of investors; domestic recession - 37%; presidential election - 35%; interest rates - 34%; and oil prices - 31%.

The survey also found 60% of investors say it's difficult to keep their emotions in check when the market swings, and 66% admit they feel helpless to protect their portfolio from market shocks, and that despite their concerns, 65% say market shocks will not affect their long-term investment strategy. Seventy-nine percent however say long-term growth is more important than short-term gains (21%).

Overall, 68% of survey participants avail themselves of some type of advice - 48% work exclusively with personal financial advisors and 6% use only automated online services, also known as robo-advisors. Another 14% use a combination of personal and robo-advisors. Seventy-one percent of investors say professional advice is worth the fee while 73% think people who have professional advisors are more likely to achieve their financial objectives than those who don't.

Beyond investment performance, the top things investors would most value getting from a financial advisor are their support to make more informed decisions about their investments (43%); the help in setting goals and establishing plans (42%); and the personalised advice in volatile and uncertain markets (40%).

Investors also are interested in going beyond dollars and cents by making investments that use environmental, social or governance (ESG) factors. Nearly three-quarters (76%) say it is important to invest in companies that reflect their personal values, including those that have a positive social impact (70%) and a good environmental record (70%) and are ethically run (83%). However, only 57% reported having discussed socially responsible investing with their financial advisor.

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