4 Biggest Lessons Investors Learned From the Pandemic

Related: Clients Have Unrealistic Investing Expectations: IRI Advisor Council

American investors are looking for 17.3% returns above inflation on their investments this year, on top of average reported gains of 16.5% in 2020, according to findings from a new survey of individual investors released Wednesday by Natixis Investment Managers. In the U.S., investors are coming out of the pandemic with long-term return expectations that are 61% higher than before its onset. Yet the survey revealed a disconnect between investors' outsized expectations and their financial fears, which have been shaped by how many experienced the pandemic and its effect on their health, finances and emotional well-being. The survey also found that for many investors, their experiences during the pandemic provided an important lesson in fundamental spending, saving, planning and investing. Natixis surveyed 750 investors in the U.S. who have at least $100,000 in household investable assets as part of a larger global survey conducted in March and April among 8,550 individual investors across 24 countries.

Upbeat Investors

The survey findings suggest that most American respondents escaped the pandemic relatively unscathed. Fifty-six percent reported no negative health or financial effect. Overall, 8% said they had caught the coronavirus, and just 14% reported any loss of household income, well below the global average of 25%. Moreover, U.S. investors reported the highest investment returns in 2020 of any country Natixis surveyed. Asked to describe how they have felt about their financial security during the pandemic, 79% of American investors said they feel fortunate, 76% resilient and 70% confident. "While not the experience of all Americans, the U.S. investors we surveyed fared better during the pandemic than those in almost every other country in terms of employment, income and investment returns," David Giunta, chief executive for the U.S. at Natixis Investment Managers, said in a statement. "Yet the long-tail physical, financial and fiscal effects of the pandemic are far-reaching and still unfolding, which creates both risks and opportunities. The big challenge for investors and those who advise them will be to position themselves for success and to remain resilient."

Pandemic's Effects on U.S. Investors

Natixis found mixed emotions among investors depending on their circumstances during the pandemic. Forty-three percent said they are stressed about their financial security. One in three have felt vulnerable, even fearful. Of respondents who had the virus, 49% said at least one other member of their household did as well. This underscored that COVID-19 and its consequences were largely experienced as a household unit, or family, according to Natixis. The survey found that the health impact of the pandemic was closely related to the financial one, as the 19% of households where one or more members caught the virus suffered a greater financial toll than those that escaped infection. Overall, Generation Y and Gen X were two times as likely as baby boomers to have been infected with the virus. Yet while younger people may be less vulnerable to the health risks, they are not immune to its effect. Twenty-eight percent of Gen X and 23% of Gen Y investors said the pandemic had significantly set them back financially, compared with 11% of boomers.

Return Expectations Gap Broadens

Not only have post-pandemic return expectations soared, but so, too, has the gap between investors' expectations of 17.5% long-term returns and the 6.7% average annual returns U.S. financial advisors believe is realistic, Natixis said, citing its 2020 survey of global financial professionals. This difference represents a 161% gap between investor and advisor expectations, up from a gap of 73% in 2019, when investors anticipated 10.9% returns above inflation. "In a prime example of recency bias, many investors seem to believe that if their investment portfolios did so well during the pandemic, they'll do even better during the recovery," Dave Goodsell, executive director of the Natixis Center for Investor Insight, said in the statement. "However, investors need to be emotionally equipped to withstand the higher levels of risk needed to pursue those outsized returns. The persistent fear of losses will test investor mettle when markets swing and will require financial advisors to help clients keep their emotions in check and their expectations grounded in reality." Sixty percent of investors said they are comfortable taking risks to get ahead. Seventy-five percent recognize market swings of 10% up or down as a normal occurrence, and 68% purported to have grown comfortable with the idea that volatility can create opportunities to grow wealth. Yet when confronted with reality, 77% of investors, including 75% of Gen X and 79% of Gen Y investors, said they would choose the safety of asset protection over investment performance. They ranked volatility as their biggest immediate investment concern, ahead of a slower-than-expected economic recovery, inflation and political dysfunction. And their greatest financial fear? Higher taxes, ranking it ahead of health care costs and job security.

Learning From the Pandemic

The pandemic stress-tested investors' personal financial behaviors. Overall, 58% of investors surveyed changed their investing accounts as a result of the pandemic, with 33% increasing trading activity, 20% investing more money and 16% increasing contributions to their retirement savings plans. Much of this activity was led by younger investors. Natixis noted widespread reports that since the pandemic began, day trading has risen sharply in popularity worldwide along with the emergence of the meme stock phenomenon. Yet while 63% of boomers said they have made no changes in their investment accounts, 82% of Gen Y and 75% of Gen X investors have done so, including roughly 1 in 4 who invested more money. Gen Y investors were most likely to increase online trading activity and to have opened a margin account. They were also likeliest to say that, in retrospect, they learned the importance of weighing the tax consequences of their investment decisions. And Gen Y and Gen X investors were two times as likely as boomers to say they learned the importance of not making emotional investment decisions. See the gallery for four important personal financial lessons investors took away from their experiences during the pandemic. — Related on ThinkAdvisor:

• Pandemic Sharpened Many Americans' Financial Discipline: Poll
• 5 Ways Advisors, Clients Have Changed in the Pandemic
• Wealthy Investors Seek Purpose-Driven Investments After Pandemic

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