Data & Research March 7, 2016

Overly Confident Investors May Take the Biggest Falls

Can advisers predict which investors are more likely to sell in market downturns?
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Investors—especially those affected by short-term trends—are understandably rattled by recent stock market dips. But it turns out some people may be more likely to make investment mistakes during a down market, according to a personal financial planning expert who says that overconfidence tops the list. Other research shows that a substantial percentage of advisers concentrate efforts on supporting their clients through staying the course in rocky markets. 

Now is an important time for investors to remember that many mistakes can be made in this economic environment, says a personal financial planning expert from the University of Missouri. In a study published in The Journal of Personal Finance, Rui Yao, an associate professor of personal financial planning, has identified several risk factors for people who are more likely to make investment mistakes during a down market.

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Yao analyzed data from the 2008 FPA-Ameriprise Financial Value of Financial Planning Research Study. That study included data about people who made a common investment mistake: moving their financial assets into a cash position during a down market without income interruptions or increased spending needs.

Most commonly, investors sell off stocks and place the cash in a bank account until the market recovers, according to “Factors Related to Making Investment Mistakes in a Down Market.” Men, Asian Americans, wealthy investors, people who are overconfident in their knowledge of the stock market and people who are loss-averse are more likely to panic and sell on the dip, Yao finds.

NEXT: Why investors do the things they do.

“Asian Americans often move to cash positions during down markets because, culturally, they are much more likely to trade on the stock market more frequently and take a short-term investment approach as opposed to a more rational long-term approach,” Yao says. “However, market timing and frequent trading rarely pay off.”

Another driver of investment mistakes is overconfidence, Yao says. “If a person has too much confidence in the market or in their own abilities as an investor, they are much more likely to sell low, which is illogical, but common,” she explains.

These findings can help advisers forecast which of their clients may be at risk for making investment mistakes. Yao recommends observing how clients react during a down market. Do they appear overconfident or fearful of losing money? These reactions can help advisers guide their clients through challenging times, teaching them to better understand market movements and to overcome mental biases. This way, they can lessen their chances of making investment mistakes.

Once the market bounces back and investors view their portfolios in a more positive light, advisers should create a plan with guidelines about what to do if and when the market takes another dive. Research shows that retirees and pre-retirees who work with a financial adviser on a plan are more confident about their retirement income. 

“During a down market, every mistake an investor makes is magnified,” Yao says. “If financial planners can identify those who are more at risk to make these mistakes, they can more effectively work with the investors beforehand to help prevent them from making such mistakes.”

Yao’s previous research examined opportunities for advisers to educate plan participants about investing during a tough economy.
Data & Research March 7, 2016

BlackRock Finds Women's Financial Outlook Is Stronger

Half are positive about their financial futures, up from 46% a year ago.
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American women are feeling more optimistic about their financial futures and more confident about their money-related decisions, according the BlackRock’s latest Global Investor Pulse survey.

Just over half, 51%, feel positive about their financial futures, up from 46% a year ago. Forty-two percent are confident they are making the right savings and investment decisions, up from 34% a year ago.

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Both women (43%) and men (41%) believe that saving for retirement should be a high priority, yet only 55% of women and 65% of men are actually saving for retirement. Perhaps as a result, 75% of women and 68% of men are concerned about their ability to meet their retirement goals.

“It’s clear that women need to become much more active in managing their money toward urgent long-term goals, particularly retirement,” says Heather Pelant, head of personal investing at BlackRock. “But our survey also indicates that women have some key positive financial instincts that can lend valuable support to their saving and investing efforts.”

As to how much annual income they would like to live on in retirement, the goals are similar for men ($45,956) and women ($45,018). The stark reality, however, is that women between the ages of 55 and 65 have accumulated an average $118,000 in savings, which would provide an average of $7,782 in annual retirement income, according to the BlackRock CoRI Index 2015. Men in that age group have an average $162,000 in savings, which would generate an average annual income of $10,807.

Not surprisingly, then, 36% of men and 52% of women said they were concerned that they might not achieve their desired retirement income goal.

NEXT: Women’s and men’s approach to finances

Women tend to emphasize the day-to-day health of their household’s finances and paying off debt, while men are more focused on investments. Sixty-one percent of women follow a household budget and 55% are focused on paying off debt, but only 23% regularly review the performance of their savings and investments. On the other hand, 33% of men regularly review their investments, and 46% concentrate on paying down debt.

Men also put a greater priority than women on growing their wealth (35% versus 28%, respectively), holding on to their wealth (26% versus 20%) considering themselves an investor (40% versus 22%) and having less of their portfolio in cash (60% versus 71%). Men are also more likely to say that they enjoy managing their investments (46% versus 26%). When asked how the idea of investing makes them feel, men are more likely to associate words like “hopeful” and “optimistic,” while women most associated “nervous” and “risky.”

When women make growing wealth a priority, 63% have investments, versus 28% who do not have this as a priority, and they are twice as likely to regularly save and invest.

Women are more highly attuned to risk than men and are more cautious about the stock market. They are also more likely to ask for advice with regards to their investments (64% versus 55%) and to value professional advice (74% versus 64%).

“Overall, in deploying their money, women are more focused on managing risks to their financial security and stability over the short term, and men are more focused on achieving long-term money goals,” Pelant says. “In fact, men and women have a lot to learn from one another, as good financial and investment planning needs to reflect both objectives.”

NEXT: Millennial women

Thirty percent of Millennial women, those between the ages of 25 and 34, enjoy managing investments, compared to 21% of Boomer women, those age 51 to 69. Thirty-seven percent of Millennial women have prioritized growing wealth, compared to 22% of Boomer women.

However, when it comes to saving for retirement, only 53% of Millennial women are doing so, compared to 71% of Millennial men. They are also considerably less likely than their male peers to feel knowledgeable about investing.

Only 35% of Millennial women use the Internet for information on long-term financial decisions, compared to 43% of Millennial men, and only 45% of Millennial women are interested in robo-advisers, compared to 72% of Millennial men. That said, a mere 23% of Boomer women are curious about robo-advisers.

“For many investors, technology is playing an increasingly meaningful role in their decision-making, either supplementing the advice of a human advisers or representing a primary source of support,” Pelant says. “It’s encouraging that younger women are attuned to the potential benefits of technology because, as with many financial habits, becoming comfortable with the role of digitally delivered guidance early on can yield benefits throughout one’s investing life.”

BlackRock’s survey is based on the responses from 30,500 people in 20 nations, including 4,000 Americans.

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