Many Investors Focus on Wrong Performance Factors

No way around it—new research from TIAA-CREF into the way U.S. retirement savers think about their investments is downright troubling. 

A new TIAA-CREF survey finds more than half of investors look to short-term performance factors when making investment decisions, while nearly one-third mistakenly believe all investments carry the same overall level of risk.

Accordingly, TIAA-CREF warns the focus on short-term financial performance and misunderstandings about the nature of investment risk may have an impact on American investors’ financial well-being, especially in the long-term effort to plan for retirement.

Overall, 36% of investors look to one-year performance as the “most important indicator of an investment’s return,” with an additional 16% looking to quarterly performance as most important. TIAA-CREF finds nearly half of investors have purchased a fund “based on its performance during the previous year rather than looking at its performance over a longer-term investment horizon such as five or 10 years.”

Roger Ferguson, president and chief executive officer of TIAA-CREF, says it’s critically important for people to look at the big picture when evaluating investment performance. “One year or one quarter is a short period of time when you consider that many individuals are investing for 30 years or more,” he adds. “Fortunately, investors can avail themselves of a range of resources, including professional financial advice, which can help them make well-informed investment decisions and build portfolios designed to meet their specific financial goals—whatever they may be.”

NEXT: Grappling with diverse concerns 

According to TIAA-CREF, investors should be less focused on recent bouts of market volatility and more focused on the key concepts of diversification and asset allocation—building a more holistic understanding of the important role that taking risk and accepting some periodic short-term losses plays in generating a stable retirement outlook.

This state of affairs is still someway off, TIAA-CREF notes, as among those surveyed, a strong majority (71%) believe they can completely eliminate investment risk by having a diversified portfolio. “In fact, while a diversified portfolio can help to manage investment risk, there is no way to eliminate it altogether,” TIAA-CREF says. Nor would one want to, given the yin-yang relationship of risk and return. 

“Similarly, although investors should maintain an appropriate level of risk in their portfolios, many are unclear about how that works,” the report explains. Currently 53% of U.S. investors think that higher risk guarantees higher returns.

TIAA-CREF finds all investors would benefit from better access to financial education about these topics, but Millennials could use the most help. Among this age cohort, 40% of all respondents misunderstand the nature of various asset classes, TIAA-CREF says, indicating that they believe that all investments offer the same level of risk. At the same time, 64% of Millennials think that higher risk guarantees higher returns, compared with 53% for the general investing population.

NEXT: Focus remains on outcomes

Despite some misconceptions about investment performance, American investors have a clear picture of what they want from their portfolio,” TIAA-CREF explains. “Two-thirds of investors believe it’s more important that their portfolio allows them to achieve their life goals, such as funding a comfortable retirement or paying for a college education, versus one-third who place more importance on a portfolio that consistently meets specific investment criteria, such as a certain percentage return.”

One specific piece of advice plan sponsors and advisers might offer to the workplace retirement investors: the middle of a period of market volatility is likely not the most effective time to rebalance the portfolio. Instead, most advisers’ recommend investors “ride out market fluctuations as part of a long-term investing strategy,” TIAA-CREF says. Another appropriate approach might be to tie the rebalancing date to a regular time of year, perhaps a birthday, cited by 21% of advisers. Other key times to reconsider the level of risk taking may be after a life change, such as marriage, the birth of a child or grandchild, or the death of a spouse (20% of advisers). 

Ferguson concludes that having a well-defined vision of one’s financial goals is a good first step for investors. “Once you have set your priorities, a financial adviser can help you find the approach that is right for you,” he concludes.

More information about the 2015 TIAA-CREF Built to perform study is here