A new study from TD Wealth reveals that people with volatile careers may also select riskier investments. Further, there’s evidence those people may feel less satisfied with their retirement readiness. Authors Lisa Brenneman, Head of Behavioural Finance at TD Wealth, and Laura Goodyear, Research Coordinator at Behavioural Economics in Action at Rotman (BEAR), join Kim Parlee to discuss the findings and some ways investors may feel more confident about their goals.
- Did you know that what you do for a living can have a big impact on how you invest and how confident you're feeling about retiring? That's just one of the findings out of the latest TD Wealth Behavioral Finance Industry Report, and it is called A Behavioral Perspective on Risk. Joining me now, the co-authors, Lisa Brenneman, she's the head of behavioral finance at TD Wealth, and Laura Goodyear, she's a research assistant and PhD candidate at Behavioral Economics in Action at the Rotman School of Management.
Lisa and Laura, I gave the title of the report. And the interesting thing is it really talks about how our own behaviors and our own attitudes put us at risks. We tend to think about the markets putting us at risk, but not us. So, Lisa, tell us a bit about this.
- Right. Well, investing has an awful lot to do with behavior and balancing those relative risks and rewards in the investment. And every single, individual person has a different personality, of course, and that personality is what impacts these risk-and-reward behaviors. And in some cases, personality may influence us to take more risk than we could or should.
And this could put in jeopardy a comfortable retirement or sending our children to the university that we want. So the reason we undertook this research and wrote the report is because, at TD Wealth, we wanted to understand how people with different personalities may think about their risk and then help them avoid any of these unnecessary consequences.
- And I guess people are thinking about their risk a lot more this year, over the past year, Laura, than they have before that.
- Absolutely. So this year has been stressful, and it's given us plenty of examples of how people act and react, including ourselves, to more extreme situation. In this report, as Lisa's mentioned, we examine how personality traits also play a role in individuals' risk-taking behavior. So for example, we examine how more reactive personalities, which are defined as people who find it more difficult to cope with stressful situations, and because of this, they might experience more negative emotions.
These individuals with more reactive personalities, they may actually experience more stress during financial downturns and could then be more likely to make a change to their portfolio as a result because they panic, and they want to do something or anything just to cope with the stress. So this is just one of many examples from this report of how our personalities can impact our risk-taking and investment behaviors, especially in more extreme or stressful situation.
- Interesting. Let's run through some of the findings. The first one that we have here is that people who said they have more volatile employment selected more volatile portfolios and were four times more-- or four times less likely, excuse me, to feel satisfied with their readiness for retirement. That's fascinating, Lisa.
Yes, and that could be anything from a career in real estate or even contract work where income may be good but is inconsistent. It's a bit volatile at times. And based on the research and what's in the report, these folks were more strongly drawn to riskier portfolios regardless, as I mentioned before, whether they had the personality, or experience, or even financial situation to do so. And that comes with tremendous highs and lows in the outcomes. And of course, one of those outcomes being four times less likely to be satisfied with their readiness for retirement.
- It's just, again, utterly fascinating that those who are the most volatile in income will be attracted to that same thing, and just I know you'll be talking more about what that can mean and how to deal with that. The other finding, or one of the other findings, I should say, is that people who said they are knowledgeable and confident about investing were 3 and 1/2 times more likely to select a volatile portfolio. Laura, what is that? What could be an issue with that?
- Yeah, so this finding may in part speak to individuals feeling overconfident about their investment abilities. Or alternatively, they might just be familiar with the market environment, all of which could lead these self-reported confident investors to pick more volatile portfolios because they believe that they'll be able to manage them in the long run.
Specifically, however, in the report, we talk about overconfidence. So being confident is good, but a potential issue is that it could also create blind spots about our shortcomings related to our own abilities because we tend not to think anything bad will happen. Or even if something bad does happen, we may believe that we're capable of handling these things that come our way. So being overly confident about your investment abilities may result in taking unnecessary risks, like picking a more volatile portfolio, and may actually cost these investors in the long run.
- So now, I know there's another piece in this report that talks about some of the ways that you can help mitigate some of these issues that we've been talking about, and that's this-- having a goal-based financial plan with an advisor can help mitigate risky market decisions. Lisa, tell me why that's the case.
- Well, if you invest on your own without a sounding board, it's quite normal to become more anxious when the markets are turbulent. And we've certainly seen that happening in the last year. However, we found that when people had a goal-based plan with the help of an advisor versus not having a plan at all, they were two times more likely to stick with that plan during times of financial stress.
You see, documenting your goals and having that sounding board, like an advisor, really helps you articulate the "why." And the "why" is the emotional part that ties you to that goal. Why do I want to send my daughter to Harvard? Why do I want to retire in Italy? And that's what helps people stay the course with the help of their advisor.
- And I would expect that that "why," that accountability structure really works or is really necessary with certain personalities, Laura.
- Yeah, so in our report, we find that different personality traits are associated with individuals being more or less able to stick to financial plans, especially during times of market turbulence. So in addition to having a goal-based financial plan, if advisors have a better understanding of who may be more or less prone to react to different market events given their different personalities, they can also proactively coach their clients to ensure that they're going to be able to stick to these goal-based plans going forward.
- So bottom line, Lisa, what should people take from this?
- Bottom line is it's just like almost like anything else in life. Knowing that you may be prone to a certain investing behavior is a step towards managing that behavior. And both Laura and I have mentioned that different personality types impact how we may make investing decisions and then the associated risk that comes with it.
At TD Wealth, we think a lot about personality and how that may help our clients achieve their goals. We've created something actually called the Wealth Personality Assessment, and it helps uncover how people think about their investing, like whether they might be overconfident and drawn to risky investments or that they may become anxious during market turbulence. And then our advisors are better positioned and may be able to help and respond accordingly.
- So just a reminder for those, if you want to take a look at the report of T-- or see TD Wealth's Personality assessment, you can go to TD.com/behaviouralfinance. Laura, Lisa, great to talk to you both. Thanks so much.
- Thank you.
- Thank you.