Survey: Investors Lose Some Risk Appetite

April 7, 2004 ( - Given market volatility of the last several years, it should not come as a surprise that many investors have become less of a risk-taker than before, according to a new survey.

Two-thirds of investors (67%) in a recent survey say they have less of a risk appetite than they did a few years ago. The fifth annual investor survey by Eaton Vance Corp. found  that nearly n ine of 10 investors (89%) say that minimizing risk is an important investment consideration.

Also, most investors continue to be sensitive to the risks of investing a large chunk of assets in a single company’s stock. Nearly nine of ten investors (88%) believe that move is too risky. Risk considerations are causing more investors to consider using a financial advisor, with 52% saying that the greater perceived risks of equity investing makes them more likely to seek outside help to manage their portfolio.

Standing Pat

Interestingly, despite the equity strength in the past year and the reported increase in risk-sensitivity, most investors aren’t fiddling with their current asset allocations.

Only four in 10 investors (42%) say they have shifted any of their investments in the past year. Among investors who changed their portfolios, 40% stepped up their stock exposure, while about a third (32%) reduced their equity holdings. Some 25% of investors who reallocated increased their exposure to bonds and other fixed- income investments, while 22% cut their fixed-income exposure.

Tax Awareness Lagging

Although investors are broadly aware of the importance of taxes on investments, understanding of investment tax issues is still notably lagging. More than three-quarters of investors (77%) say they pore over their financial statements with regard to investment tax implications and eight in ten investors (80%) say they believe taxes have an important impact on stock mutual fund performance.

More than eight in ten investors (82%) haven’t ever heard of an IRS Form 1099 and nearly nine in ten investors (87%) consider disclosure by mutual funds of the tax implications of fund investments to be important.

One reason investors could be confused about investment tax issues is because they seldom discuss the subject with financial advisors. Among investors who use an advisor, four in ten (40%) discuss investment tax issues with their advisor. Only 15% of investors who use an adviser discuss investment tax issues with their advisor a great deal.

Not Much Change After 2003 Tax Bill

Speaking of taxes, nearly a year after its enactment, few American investors are familiar with the Jobs & Growth Tax Relief Reconciliation Act of 2003 and fewer still have adjusted their investment programs to take advantage of its provisions.

The survey reveals that only one in five investors (21%) is conversant about the act, and only one in 10 investors (9%) has made investment changes as a result.

Just 15% of investors have discussed the act’s implications with their advisors.

The 2003 Tax Act slashed federal tax rates for individual taxpayers to a maximum of 35% (from 38.6%) for ordinary income and 15% (from 20%) for long-term capital gains. The act also reduced federal individual tax rates on “qualified dividend income” to a maximum of 15% from the previous high of 38.6%.

According to the survey, only one in five investors (20%) can correctly cite the current maximum federal tax rate for ordinary income, and fewer than two in five investors (less than 40%) can identify the maximum federal tax rate for long-term capital gains and qualified dividends. Of investors who are aware that not all dividends qualify for favorable federal income tax treatment, only half (51%) can name any categories of investments that can qualify for favorable dividend tax treatment. Nearly six in 10 investors (57%) say they wish they better understood the impact of the 2003 Tax Act on their investments.

The nationally representative telephone study covered 500 U.S.residents who have invested in both qualified retirement plans and investments outside of qualified retirement plans. The study was conducted during the first two weeks of March 2004.