Fear & Trepidation from the Investment Sidelines

Searching for solutions amid general volatility, investors look for a sign

By Robert DeChellis

Mr. DeChellis is president of Allianz Life Financial Services, LLC. Connect with him by e-mail: Robert.DeChellis@allianzlife.com

For the better part of 2013, stocks have been moving in one direction – up. Both the S&P 500 Index and Dow Jones Industrial Index hit all-time highs in mid-September, underscoring a strong year so far for equity markets1. Yet, according to recent figures from JP Morgan, there is still more than $8 trillion2 sitting in cash, much of it waiting to be invested.

This begs two important questions – what is keeping investors out of the market and what will motivate them to put their money back to work?

In order to gain insight into this phenomenon, my company surveyed more than 1,000 investors ages 25 to 75+ with more than $200,000 in investable assets. Furthermore, these wealthy investors were surveyed at the end of July, when market performance was particularly strong.

Surprisingly, market volatility was identified as key concern keeping people from investing. It’s clear that for many investors the trauma caused by the 2008 financial crisis is still being felt and is dampening their willingness to take on risk with their savings. Despite a 1,000+ point gain in the S&P 500 Index between March 2009 and August 20133, more than three quarters (79%) of respondents said they believe the market will continue to be volatile when making retirement plans, and nearly six in 10 (59%) noted market volatility as an economic concern having an effect on their retirement outlook.

Perhaps even more unexpected was the extent of this concern. Wealthy Americans’ belief that constant market volatility will have a negative effect on their retirement planning was consistent across age ranges, and was actually highest among younger investors – a group that should in theory be more immune to market fluctuations as they build assets for retirement. At least three quarters of Gen X/Gen Y (25-44, 82%), baby boomers (45-68, 80%), and older investors (69+, 75%) surveyed noted market volatility as a concern in their retirement planning.

Given the impact of investment decisions affecting retirement can be a ways off for some, the survey also asked these wealthy Americans about the top barriers to investing idle cash today. Once again, market volatility topped the list, with 38% of respondents noting it as their top concern and nearly half of those (49%) coming from the Gen X/Gen Y group.

Market volatility wasn’t the only factor affecting wealthy investors’ willingness to invest. In addition to fears about equity markets, the survey also found these investors are unhappy with returns from less volatile investments. More than six in 10 (62%) investors surveyed said they are challenged to find sufficient yield/return in today’s low interest rate environment. Thirty-eight percent also noted low interest rates as a reason preventing them from investing idle cash today.

Wealthy Investors Want Balance

So are these investors determined to stay out of the market, content to put their money under the mattress until retirement begins? Not exactly.

Although 6% of respondents noted they’d be happy to tuck their money under the bed, the majority are actually ready to invest. When asked what they are most likely to do with $20,000 in idle cash today, 20% said they would look for a product with high growth potential, but the majority (63%) said they would invest in a product with a balance of protection from loss and growth potential.

When it comes specifically to saving for retirement, the desire for protection was even more pronounced. In total, 95% of respondents said they would like a financial product with no potential loss or at least some level of protection from loss rather than one with unlimited potential growth but also unlimited potential loss. Once again, balance was the preferred strategy as more than three quarters (76%) said they would prefer a product that offers a balance of potential growth (up to 10%) and a level of protection that shelters them from up to 10% of losses.

So are these investors determined to stay out of the market, content to put their money under the mattress until retirement begins? Not exactly

Investors were consistent in their preference for financial products with lower returns but less risk, favoring guarantees over growth. When asked which financial product is more attractive – one with a 4% return that is guaranteed not to lose value or one with an 8% return, but with the possibility of losing value due to market downturns – 70% of respondents chose the 4% product with guarantees. This response rose to 72% for those who indicated they work with a financial professional.

Industry Innovation – the IVA

Clearly, wealthy Americans are reluctant to risk their money in today’s volatile markets, and part of that hesitation comes from a lack of available financial products that meet their needs for asset accumulation. In fact, nearly a quarter (23%) of respondents said a lack of retirement products offering a balance of growth opportunity and loss protection was preventing them from investing idle cash today.
Thankfully, the insurance industry has been listening to these concerns and responded with the development of the Indexed Variable Annuity (IVA) – an entirely new breed of variable annuity that may be a fit for consumers who are willing to trade some potential gains from market growth in exchange for a level of protection from down markets.
Compared to Fixed Index Annuities (FIAs), the IVA increases the amount of return potential by having much higher limits (or caps) on the interest credit coming from the growth of an equity index in exchange for less protection. Some IVAs offer protection from the first 10% of losses per year versus guarantees of no losses from a traditional FIA, although some IVAs will offer that option in exchange for less upside potential. This is a fundamental shift for accumulation choices among variable annuities.
The flexibility offered by IVAs allows clients to customize their contracts based on their individual accumulation objectives and risk tolerance, helping people to build their retirement savings with more confidence. Because IVAs are meant to assist with asset accumulation, and also provide protection for retirement savings, these products offer a possible solution for those seeking a potential middle ground between their timeline and goals.

Longevity, Inflation & Market Volatility

People are living longer than ever and need a sizeable portfolio to ensure their money lasts as long as they do. Yet, it’s not enough for their retirement assets to only address longevity – they also need to withstand the effects of inflation in order to keep up with the rising cost of living. This won’t happen by keeping money under the mattress or even in conservative investments producing minimal returns due to low interest rates. Add in fears about market volatility, and it’s clear financial professionals are challenged to find strategies that can both get their clients motivated to invest, but also provide them with the reassurance they want.

It’s important to explore the new IVA option to ensure you’re educated on all potential solutions that can help your clients build the assets they need for retirement. Consumers, still nervous about the market, also say they want to move idle cash into the market – provided they have some form of guarantee, which is backed by the financial strength and claims paying ability of the issuing company. A retirement product like an IVA that offers a balanced approach could be the right course of action for many wealthy Americans in the current market environment.


Variable annuities and variable options are offered by prospectus only, which is available by calling Allianz Life Financial Services, LLC at 800.542.5427. The prospectuses contain details on investment objectives, risks, fees, and expenses, as well as other information about the variable annuity and variable options, which your clients should carefully consider. Encourage your clients to read the prospectuses thoroughly before sending money.
Issued by Allianz Life Insurance Company of North America and distributed by its affiliate, Allianz Life Financial Services, LLC, member FINRA, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.542.5427 www.allianzlife.com
1. S&P 500 Index and Dow Jones Industrial Index – historical data
2. As of March 31, 2013, JPMorgan, 2nd Quarter Market Insights.
3. S&P 500 Index – historical data