In April of 2017, CNBC reported that assets were “flocking “ to index funds. On April 17, CNBC’s correspondent Lewis Braham reported that flows into passive index funds was at $236 billion in 2016 while flows out of actively managed U.S. equity funds “leaped” to $264.5 billion in 2016. While these numbers seem to intimate that investors were choosing index funds over other strategies, when investors were asked the same question….the answer was “not so fast”.
As an average investor – I know a little but not a lot – the concept of using index funds as an investment strategy sort of makes sense. What if I don’t want to pay for a financial advisor and instead choose one of the index funds that tracks the market? Makes sense, right? Especially when the market is going up…..
In fact, only 8 percent of millionaire investors indicate that they use an “index strategy” as one of their key investment strategies, according to Spectrem Group’s research with high net worth investors. In fact, this attitude varied little despite age, wealth level, gender or other factors. In fact, most investors indicate their investment strategy is “passive” or “buy and hold” with 35% of investors follow this “passive” or “buy and hold” strategy. Adoption of this strategy does vary somewhat, especially by age. Only 30% of Millennials follow this strategy compared to 38% of the WWII generation.
When investors were polled about their investment strategy Millennials were the most likely to indicate that they had “no strategy” compared to only 5% of other age groups. They were also the most likely to follow a “contrarian strategy” defined as looking for good companies in a time of down markets and buying a lot of shares of that company in order to make a long term profit. Twenty-two percent of Millennials claim to have an “Active” investment strategy – “I’m actively moving in and out of investments, depending on the economy, investment performance and other factors”. Twenty six percent of Gen Xers follow this same strategy.
How much does the average investor really know about investment strategies? Eighty three percent of Millionaire investors indicate they are fairly or very knowledgeable about investments. Only 16% would indicate they are not very knowledgeable. But despite their knowledge, 79% rely on an advisor to some extent. Thirty six percent will, however, define themselves as primarily self-directed. This means that even though they have an advisor, they perceive that they make all of their own investment decisions. Another 30% will go to their advisor when they need to make major “life event” types of decisions but otherwise make their own decisions. Twenty-one percent will consult regularly with their advisor but make their own decisions. Only 13% depend on their advisor.
The fact that most investors indicate that they have a “buy and hold” strategy indicates that, despite their own perception of their reliance upon an advisor, the advice of many advisors is actually guiding their investment strategy. Therefore, assets that are being invested in index funds are, in many cases, being guided there by savvy advisors.