Confidence Levels, Risk Tolerance and Need for Consistent Market Stability Contributing to Changes in Investor Behavior

October 08, 2010 08:30 AM Eastern Daylight Time

BOSTON—( BUSINESS WIRE )—Fidelity Investments ®. a leading online brokerage company and the No. 1 provider of workplace retirement savings plans and Individual Retirement Accounts (IRAs) 1. released research 2 findings today that indicate investors are redefining how they measure financial success amid changing confidence levels and risk tolerance in today’s fluctuating markets.

According to the survey, more than half (55 percent) of investors say any positive gains in their portfolios in these markets qualifies as a success, while another 23 percent believe that break-even investment returns can be considered successful.

With 41 percent of the trading days in the past two years experiencing at least a 100-point rise or fall in the closing price of the Dow Jones Industrial Average, investors’ confidence levels also have been tested. While active investors, who trade more frequently, have been working closely with Fidelity to take advantage of the daily market changes, many general investors (57 percent) in this study report they still lack confidence in their ability to make correct investing decisions. For some investors, this lack of confidence is influencing their investment behavior, with roughly 20 percent saying they either pulled out of the market or stopped monitoring their investments altogether.

However, a number of investors are starting to view the ongoing volatility as normal market behavior and are beginning to get more comfortable with the regular swings. In fact, four out of 10 investors (43 percent) report they are feeling confident in their investment decisions. Additionally, 22 percent say they’ve now adjusted to these new market conditions and are becoming more engaged in managing or monitoring their investments.

Another indicator of comfort is that less than half (47 percent) of investors – when asked what length of time they would need to see no significant market volatility before feeling more comfortable increasing their investments in the market – said six months to a year, down from 57 percent in July 2010 3.

“Although the past two years have been tough on investors, we are making progress in helping them to not only understand that volatility may be here for the long term, but how best to re-engage in these markets by evaluating their risk tolerance and setting financial goals that are appropriate to both their personal situation and the current investing environment,” said John Sweeney, executive vice president, Fidelity Investments. “When these factors align, it’s much easier for investors to make sound investment decisions about their portfolios and ride out the daily fluctuations.”

Investors’ reactions to market declines can be heavily dependant on their confidence levels in understanding the amount of risk they can assume in their investments. When investors were asked if their tolerance for risk had changed, Fidelity found 40 percent were seeking lower risk in their portfolio today as compared to two years ago. For these individuals, avoiding emotional investing decisions is critical to their long-term investing success.

Fidelity conducted a market-timing analysis for two different investment scenarios based on the performance of a hypothetical balanced portfolio of $100,000 from Oct. 1, 2008 through Sept. 30, 2010 4. The investment mix of the portfolio was 50 percent in stocks, 40 percent in bonds and 10 percent in short-term investments. The findings for the two investment scenarios, outlined below, were vastly different.

In the first scenario, an investor made the decision to move all of his/her investments to cash and continued to make ongoing $300 monthly contributions also in cash. In this case, the value of the portfolio would have only hypothetically increased 7.5 percent (0.3 percent market return and 7.2 percent from contributions over the two-year period). In the second scenario, the investor remained fully invested in the same balanced portfolio throughout the entire timeframe, and also continued making ongoing $300 monthly contributions. This portfolio would have hypothetically increased 16.7 percent (9.5 percent market return and 7.2 percent from contributions over the two-year period).

Some investors have experienced this result first hand. In fact, when asked to cite regrets about their own investing behavior over the past two years, nearly one in five (18 percent) investors said not continuing to invest in the market, or waiting too long to get back in, impacted their total current assets, which were down an average of 21 percent when compared to two years ago.

Fidelity Offers Guidance, Resources for Investors Looking for Help

When asked about their biggest investing concerns over the next 12 months, investors rank domestic economic instability (31 percent), unemployment (29 percent) and potential tax rate increases (15 percent) as their top three.

To help investors navigate through the ongoing market volatility and economic challenges, including changes to the tax landscape, Fidelity offers a broad spectrum of products, services and educational resources. This includes Fidelity’s weekly Viewpoints articles, which are written by the firm’s seasoned money management experts and highlight timely investing perspectives, market and economic commentary. Over the past two years, investors have accessed these articles more than two million times at www.fidelity.com/viewpoints.

For investors seeking to better understand potential tax changes and their corresponding impact on an investing portfolio, Fidelity offers a “Tax-Smart Investing” seminar (www.fidelity.com/seminars ), along with one-on-one guidance and extensive online educational resources.

“Over the past two years we’ve made it a priority to proactively reach out to investors, on a regular basis, so we can stay on top of how they’re feeling about the volatility and better understand what help and guidance they need during these challenging times to better manage their investments,” said Sweeney.

For additional investing guidance, investors can call 1-800-FIDELITY, stop by any of Fidelity’s 143 investor centers across the United States or visit www.fidelity.com.

About Fidelity Investments

Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of nearly $3.2 trillion, including managed assets of more than $1.4 trillion, as of Aug. 31, 2010. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.

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1 Cerulli Edge Retirement Edition, First Quarter 2010 (Data as of Q3 2009)

2 Data were collected via an online survey among a national sample of 754 adults with investment accounts. Interviewing was conducted from September 22-24, 2010, by the independent research firm Synovate, Inc. not affiliated with Fidelity Investments. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study.

3 Fidelity conducted a national telephone survey of 518 investors who were 18 years or older and had retirement and/or non-retirement savings outside of a cash account. This question was asked of investors who were waiting for prolonged market stability to invest more. This survey was conducted between July 9 and 12, 2010, by Infogroup ®. an independent company not affiliated with Fidelity Investments. The results of this survey may not be representative of all adults meeting the same criteria as those surveyed for this study.

4 Scenarios created by investing $100,000 where, for each scenario, transactions occurred as of closing prices on the trading day immediately prior to the starting date and ending as of the closing prices on the last trading day in the period. All dividends and distributions were reinvested; rebalancing occurred on the last day of each month. Indices for performance used were as follows: U.S. Stocks – S&P 500 Total Return Index; Bonds – U.S. Intermediate Government Bond Total Return Index; Cash — U.S. Treasury Bills Total Return Index. This hypothetical is for illustrative purposes only and is not intended to predict or project the performance of any investment security. Taxes, inflation, fees and/or expenses were not taken into account. If they had been deducted, performance would have been lower. Past performance is not a guarantee of future results.

Contacts

Fidelity Investments

Corporate Communications, 617-563-5800