Jackson National study reveals hidden dangers for risk-averse investors

A new Jackson National Life Insurance study exposes a surprising truth: Risk-averse investors may be vulnerable to a different form of market risk — the risk of low long-term returns. The research, the fourth installment in Jackson's Security in Retirement Series research, was conducted in collaboration with the Center for Retirement Research at Boston College.

To better understand market risk exposure, Jackson developed the proprietary Market Risk Vulnerability Index (Index). This tool helps evaluate investors’ financial positioning against five key benchmarks:

• Spending
• Savings
• Cash allocation
• Stock-bond split
• Diversification

Based on how many of the benchmarks they met, investors were scored as low-index (least vulnerable to market risk), medium-index, or high-index (most vulnerable to market risk).

The index revealed that:

• 57% of high-index investors spend over 50% of their income on basic needs, compared to just 5% of low-index investors.
• Only 4% of high-index investors meet the recommended stock allocation, leaving them ill-prepared for long-term growth.
• High-index investors are more than twice as likely as low-index investors to cite longevity risk as a major concern (56% vs. 27%); yet, they are less likely to have a plan in place to address it.

Additional key findings from the study include:

• Widespread financial vulnerability. The Jackson report highlights significant financial vulnerability among investors who are nearing or are in retirement. For example, approximately 30% of the survey respondents reported investable assets between $100,000 and $299,999. Many investors fail to meet key benchmarks of general financial health such as appropriate cash allocation, retirement savings targets, or asset diversification, with only 14% of high-index investors meeting the recommended asset diversification benchmark.
• Risk-averse investors face heightened risk exposure. Investors in the study who describe themselves as unwilling to take risks are among the most vulnerable to the market risk of not realizing potential investment gains. These individuals often hold excessive cash positions — with their ideal cash holdings averaging 49% of total assets, more than double the recommended 20% threshold — and lack diversification. Such behaviors, while cautious on the surface, may leave these investors in a disadvantaged position. High cash holdings can minimize gains during market upswings, and a lack of diversification can leave investors more exposed to market volatility during downturns.
• Diversification is too often cited as a tactic to protect against market risk. But while diversification is a foundational strategy for managing many portfolio risks, it is ineffective in protecting against market risk. However, the study found financial professionals and investors widely cite diversification as a key tactic. During systemic market events like the 2008 financial crisis or the 2020 COVID-19 crash, nearly all asset classes declined together, often rendering traditional diversification strategies ineffective without additional protective measures like annuities or hedging tools like derivatives.
• Moderate risk-taking correlates with better outcomes. Investors who adopt a balanced approach to risk (favoring diversification and moderate equity exposure) are more likely to meet key financial benchmarks. They are also more likely to use cost-efficient tools like index mutual funds and ETFs, contributing to better long-term outcomes.

Retirement vulnerabilities of the risk-averse investor

In a recent interview, Glen Franklin, assistant vice president of research, RIA, and lead generation strategy for Jackson National Life Distributors LLC (JNLD), the marketing and distribution business of Jackson, further explained some of the survey’s key findings. First, he said, some of the people in the study who report having a low risk tolerance also have investment preferences that may address one risk but amplify others. “For example,” he pointed out, “high index investors indicated their ideal cash allocation was 49%. That might help them avoid market volatility now, yet, at the same time, makes them vulnerable to other major retirement-related risks, such as inflation risk and longevity risk in the future.”

Also, Franklin said, “we found that high-index investors in the study lack financial resilience. On average, they have investable assets 70% lower than their low-index counterparts, and their average remaining mortgage balance is 78% higher than that of low-index investors. This is surprising, because to qualify for the study, they had to have a minimum of $100,000 in financial assets.”

Does diversification protect against market risk?

In addition, the study pointed out the ineffectiveness of diversification in protecting against market risk. And why is this the case? “Both financial professionals and investors report that diversification is the primary strategy for reducing risk,” Franklin pointed out. “Diversification is appropriate for mitigating un-systemic (or unsystematic) risk, such as too much exposure to a single company, industry or market sector,” he added.  “However, market risk is systemic. To address it, an investor must use some form of insurance, such as purchasing options, employing a hedging strategy, or by acquiring an insurance product such as an annuity.”

The risk of low long-term results

Franklin also explained another risk identified in the study--the risk of low long-term results. As he pointed out, low long-term returns amplify major retirement-related risks, including longevity risk, inflation risk and healthcare risk.

With increasing lifespans and the very real possibility of living 30 or more years in retirement, Franklin added, it is no longer appropriate to rebalance the retirement portfolio entirely to low risk/lower return assets once someone is in retirement. “That may result in outliving your savings,” he said.

Meanwhile, he added, “price increases have the effect of reducing the purchasing power of your savings. For example, the long-term average inflation rate is 3%. At that rate, prices double in 24 years, which is another way of saying the value of your savings is cut in half. What’s more, the long-term average inflation rate for healthcare expenses is higher, at between 4%-5%. In that range, costs double every 14-18 years—and for many, healthcare is the largest expense in retirement.”

Why risk-averse investors may face higher risk 

Also, as noted in the study, risk-averse investors face a higher level of risk exposure. So, why is this the case? Numbers alone can’t explain why people make surprising choices about retirement, Franklin said. “Our emotions are powerful and often guide our decisions, even when logic says otherwise,” he added. “It may be that risk-averse investors are unaware of the array of risks they face in retirement, or it may be that facing all those risks is overwhelming.”

Helping clients avoid market risks

So, what are some of the steps that financial advisors can take to assist their clients in avoiding the market risks identified in the study and help them build resilience against market volatility? “Our study found that 72% of low-index investors work with a financial professional, compared to just 43% of high-index investors,” said Franklin.  “So,” he added, “it appears that financial professionals are generally providing the guidance necessary to help their clients address retirement-related risks. What’s more, of the financial professionals surveyed, 61% use annuities with guaranteed income to manage investment risk for clients in retirement. The issue for some investors is that they are not seeking professional advice, leaving them less well prepared to face market risk.”

The research, fielded between October 15-29, 2024, included online surveys of more than 1,000 investors with at least $100,000 in financial assets, who are between the ages of 48 and 78 years. An additional online survey of 400 financial professionals was conducted between November 4-18, 2024, with respondents being client-facing financial professionals with at least 75 clients.

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