It’s no secret that yields are hard to find today. Typically a safe haven for income-seeking retirees, Treasurys yield a meager 1.61% on a 10-year note and 2.7% on a 30-year. Europe is a mess, causing many investors to wait on the stock market sidelines, hoping for an indication of a boom or bust. Uncertainty is pervasive. According to a recent “Barometer” report from BlackRock, that uncertainty is rearing its head in the form of baffled investors, inflation-susceptible assets and delayed retirements.
In fact, 46% of the investors surveyed by BlackRock, all of whom have at least $250,000 in investable assets, say they are planning on a later retirement than they initially thought. As life expectancies increase and the economy remains murky, investors delay their retirement dreams, choosing to stay in jobs rather than face the rocky road of income investing.
“Living longer is a wonderful prospect,” says Frank Porcelli, head of BlackRock’s U.S. Retail Business, “but for many investors the notion only heightens concern about whether their money will last.”
Consequently, investors are seeking new income streams and methods of maintaining wealth, and most don’t like what they’re finding. 57% of respondents characterized the current investment environment as “uncertain,” with 89% unwilling to take on risk in their portfolios. In fact, notes the report, “60% of respondents said that investing for income has become ‘riskier’ than it was five years ago” – the time period directly preceding the financial crisis. To put it bluntly, aging investors are scared of the market.
“Uncertainty is often a crippling factor when it comes to investing,” says Frank Porcelli, head of BlackRock’s U.S. Retail Business. “All too often, when uncertain, investors do nothing at all.”
To wit, only one in ten investors surveyed is adjusting their portfolio, a 10% drop from just six months ago.
That inaction can lead to drastic results, particularly when investors stay put in cash rather than investing in even low-yielding bonds. Inflation, often a hidden threat to which investors don’t pay much heed, can decimate retirees’ spending power. 67% of respondents to BlackRock’s survey said they consider the impact of inflation, but don’t focus on it.
“Inflation risk can end up really creating a huge problem,” says Rob Kron, Head of Retirement & Investments Education at BlackRock. “If you have a healthy couple reach the age of 65, there’s a 50% chance that one of those people will live into their 90s. If they stay paralyzed in cash, over that 25 year period, with just a 3% inflation rate, their purchasing power can be cut in half.”
Just as troublesome as inflation risk is the fact that investors, even when optimistic about the market, don’t know how and where to invest their cash. The Barometer report reveals a conflicted investor base, with net flows in equities, emerging markets and alternative investments nearly zero. As 38% of investors sink money into emerging markets, 36% take money out. As 30% go into equities, 36% get out. As 20% seek alternative investments, 24% move out of them.
“There’s a battle between wanting to be optimistic about the future and [investors] knowing they should do something, but the survey was clearly telling us they’re not sure what to do,” says Kron. “Investors don’t clearly have their arms around this stuff yet.”
“The old ways of investing no longer work,” says Porcelli. “Investors still need plenty of fundamental support and direction in adjusting to a new world.”
“Portfolios need to be more dynamic and diverse today, given the current environment,” agrees Kron. “They have to look beyond domestic stocks and bonds – things like equity dividend funds, high-yield bonds, and multi-asset income funds.”
So what's to be done? For Kron, the answer is persistent education, both for investors and their advisors. As investors adjust to the current environment and learn more about alternative investment options outside the typical realm of domestic stocks and bonds, they will get more comfortable putting their money to work in new ways. Although longer life expectancy can be a daunting idea for investors facing retirement, it also presents opportunities for lengthening investment horizons, allowing investors to weather downturns and potentially allocate capital to riskier investments.
“We often refer to ‘using your longevity,’” says Kron. “Since when did living longer become a bad thing?”
