Assessing and explaining risk: Investors' expectations after the financial crisis was written by the Economist Intelligence Unit and commissioned by Goldman Sachs Asset Management. It is based on two strands of research, a survey of private investors, financial advisers and corporate investors, and in-depth interviews with advisers and investors. The authors of the report were Julian Marr and Cherry Reynard and the editor was Monica Woodley. We are grateful to the many people who assisted our research.

Key findings from this research include:

Only a minority of investors think the recent financial crisis was as bad as it can get: Despite the wild swings in financial markets at the peak of the crisis, just 14% of respondents said the volatility was ‘beyond anything I could have imagined’ while 28% said it was ‘within expected volatility’. Nearly half of the respondents (41%) believe that market volatility was merely ‘unusual’ compared with their ‘worst-case scenario’ expectations.

Investors now realise there is no such thing as a ‘safe haven’: Perceived risk in all asset classes has increased and the `safe haven’ status of asset classes such as cash and fixed income has been challenged. This has been the biggest shock for European investors – 65% of them feel bond investing has become riskier – as they traditionally have invested heavily in fixed income, an area widely perceived to be less risky than most other asset classes.
Over half of respondents say they view investing in stocks, bonds, property, private equity and hedge funds as slightly or much riskier than before, with commodities being the slight exception: just 35% of respondents believe investing in commodities is slightly or much riskier than it used to be.

British private investors believe they were less affected by the crisis than their continental counterparts: Less than a quarter of private investors in the UK (23%) say their investments suffered more or significantly more than expected during the financial crisis, compared to 43% of mainland European investors. No investors in the UK and just 5% in continental Europe say that all personal goals have been put at risk and 18% and 14% respectively say that some will not be achievable, but 46% of UK investors say the crisis had very little or no impact on their goals, compared to 36% of continental Europeans.

Continental advisers believe the crisis affected their clients more than the clients themselves believe: Nine out of 10 of continental advisers believe the financial crisis and subsequent recession mean either some personal goals will not be achievable by their typical client or those personal goals will be somewhat more difficult to achieve, while 64% of European private investors and 67% of corporate advisers say so. There is more correspondence between UK advisers and their private and corporate clients, with roughly six out of 10 of each saying that the crisis means that all or some goals will not be achieved or that they will be somewhat more difficult to achieve.

British private investors are more open to taking risk to achieve their investment goals than mainland European investors: Over a quarter (27%) of investors in the UK describe themselves as adventurous or somewhat adventurous, compared to just 9% of continental investors. Also, 64% of British investors agree or strongly agree that they are willing to choose high-risk investments in order to achieve high returns, compared to just 32% of European investors. Financial advisers concur that Europeans have become more risk adverse due to the crisis, with 88% of continental advisers agreeing or strongly agreeing, compared to 61% of British advisers.

Corporate and individual investors are fairly united in their perceptions of risk, but the views of financial advisers differ significantly: Investors tend to perceive investing in stocks, bonds and alternatives as much riskier than their advisers do. While 44% of advisers see investing in stocks as riskier than it used to be, 58% of corporate investors and 65% of private investors do. Views diverge sharply over commodities as well, with just 27% of advisers seeing them as riskier investments, compared to 46% of corporate investors and 49% of private investors.

Corporate investors have further diversified their asset mix in response to the crisis: Over three fourths of corporate investors on both sides of the Channel made their asset allocation more cautious due to the financial crisis, and this trend has been more marked in the UK than mainland Europe. Even so, three-fifths of continental corporate investors, compared with two-fifths in the UK, now use a wider range of asset classes than they did 10 years ago to spread their risk. Over half of corporate investors have made long-term policy changes regarding their investments due to the financial crisis.

Investment risk needs to be redefined and investors’ expectations need to be realigned with market conditions: The financial crisis and subsequent market volatility have left investors in little doubt that investing and risk go hand in hand. But many financial advisers believe their clients still have unrealistic expectations, with a third overall and over half of continental advisers saying their clients continue to expect complete protection from risk. More than half (69%) of the advisers surveyed believe that the designation of investment strategies and products as low or high risk needs to be reviewed in light of the financial crisis.

Investors are heavily influenced by the media: Despite their access to advice, over half of private and corporate investors say the financial press is a major influence on their investment decisions. Investors also say they feel much more aware of the risks in financial markets because of what they read in the press.