Investors are in for a rude awakening about a coming stock market correction — most just don't know it yet. No one knows when the crash will come or what will cause it — and no one can. But what's worse for most investors is they have no clue how much they stand to lose when it inevitably happens.
"If you look at the market historically, we have had, on average, a crash about every eight to 10 years, and essentially the average loss is about 42 percent," said Kendrick Wakeman, CEO of financial technology and investment analytics firm FinMason.
Many investors have no idea how their portfolios would fare if the equity market took a big hit, according to a risk-tolerance survey FinMason did late last year. Most investors are unaware of the amount of risk in their equity portfolios. As a result, these investors make poor, costly sell decisions at the worst time: when the markets do correct.
"That's a big problem," Wakeman said. Most individual reactions to an unexpected loss are much worse than reactions to an anticipated one.
Only 57 percent of investors (both those who have an advisor and those who don't) said they understand the term risk tolerance. Investors who work with an advisor do know more: 68 percent understand their individual risk tolerance. But working with a financial advisor hasn't helped as much as it should. Only a little more than one-quarter of those who work with an advisor (27 percent) had been told by the advisor how much their portfolios could lose if there were a market crash.
Of those investors whose advisors had talked to them about a crash, 62 percent believe their loss would be less than what their stated exposure to equities would suggest, the survey found. The survey found that up to 57 percent of clients working with advisors will likely panic and sell in a crash.