Surveys are beginning to record what we all know is true. The financial crisis has had a profound impact on investors. In fact, 58 percent of investors have lost faith in the stock market, according to a survey of 1,274 Americans conducted by Prudential Financial. Forty percent say they have a conservative portfolio, up from 33 percent before the recession, and 44 percent say they are unlikely to ever again invest in stocks. Only 37 percent describe their portfolios as aggressive, down from 46 percent prior to the recession.
While 70 percent of the respondents said they have taken steps to improve their financial situation by saving more or reallocating their investments, the majority have moved their money to more conservative investments. This move to safety creates a new risk that they might fall short on achieving their retirement goals.
For most investors, the biggest threat to a financially secure retirement is not short-term market volatility, but inflation. Consider this: Even if inflation stays at the historical level of 3 percent, the cost of almost everything will double in 24 years. That means if you are living on $80,000 in 2011, by 2035, you’ll need $160,000 to maintain your standard of living. Accordingly, as we plan for retirements to span greater than three decades, it’s clear that portfolios comprised solely of bonds and cash will not protect against inflation. Today, the increased length of retirement requires an allocation to global equities for growth potential and diversification.
Yet, investors may not be as reluctant to invest in equities as they report. According to Strategic Insight, year-to-date cash contributions through April to equity and hybrid funds have surpassed inflows to fixed income funds for the first time since the financial crisis. Equity funds netted $110 billion through April, mixed funds $30 billion and bond funds $100 billion as investors acknowledge higher equity allocations to meet their long-term financial objectives.”