By Barbara O’Neill, Ph.D., CFP®, [email protected]
Personal finance research findings are the foundation of high-quality financial education briefings, publications, and counseling sessions. Below are key findings and implications for practice from four recent studies:
Investment Risk Tolerance: Rabbani et al. (2021) studied the association of financial risk tolerance (FRT) and stock market performance during a period of volatile stock market volatility in 2018-2019. A decrease in FRT was found across the sample but was exhibited most acutely by younger, nonmarried respondents with few investable assets. Males showed decreases in FRT in four time periods studied while females took longer to process negative market data before FRT changed. Another key finding was that financial counselors/planners likely serve a “buffering” role when investors experience financial shocks by educating and calming clients.
- Implications: Pay special attention to male investors and those with limited capital to explain market risk and principles of successful investing (e.g., diversification and dollar-cost averaging) and mitigate panic selling.
Retirement Planning: Blanchett (2021) reviewed age assumptions used in retirement plans and found that they did not incorporate “tail risk” associated with a longer potential retirement period for a married couple. Simulations suggest adding five years to the projected life expectancy for a single household and eight years to the longest life expectancy of either member of a joint household to increase the probability of not outliving savings. A retirement period of 30 years (to age 95) was assumed for a 65-year-old male/female couple.
- Implications: Regularly review assumptions used in personal retirement plans and underlying assumptions of financial calculators. Also, incorporate “tail risk” recommendations into personal plans.
Financial Education Impact: The Jump$tart Coalition’s Financial Foundations for Educators (J$FFE) impact study found that educating high school teachers on the basics of personal finance related to their own lives made them significantly more effective in enhancing the financial literacy of their students. Student knowledge scores increased by 24% following teachers’ participation in J$FEE. Effects were even more pronounced on students from historically financially underserved communities and teachers with less than ten years of experience.
- Implications: Learn something new about personal finance daily. Educators’ effort to increase their own financial knowledge is a ‘win-win” for themselves and their students. Financial education has multiplier effects!
Gendered Investment Differences: Researchers at the Employee Benefit Research Institute found that, for account holders with no target-date fund (TDF) exposure, the proportion of equity investments is much greater for males than females, especially at younger ages. Females without TDFs in their portfolio invest more in fixed income securities than males and males without TDFs invest more in broad international equity funds. TDFs have an “equalizing effect” because gendered differences are greatly reduced with at least some TDF exposure.
- Implications: Teach clients about the features and benefits of TDFs and encourage them to select TDFs for at least a portion of their investment portfolio (e.g., TSP L (lifecycle) fund). Built-in TDF asset allocation weights can help steer investors toward a better-performing portfolio that is outside their “comfort zone”
Blanchett, D.M. (2021). How to estimate “the end” of retirement. Journal of Financial Planning, 34(8), 88-99. https://www.financialplanningassociation.org/article/journal/AUG21-how-estimate-end-retirement
Public Retirement Research Lab (2021). Gender and age differences in equity asset allocation are mitigated by the use of target-date funds. https://www.ebri.org/docs/default-source/prrl/study-snapshots/03-ssg_assetallocation_1jul2021.pdf.
Rabbani, A.G., Grable, J.E., O’Neill, B, Lawrence, F., & Yao, Z. (2021). Financial risk tolerance before and after a stock market shock: Testing the recency bias hypothesis. Journal of Financial Counseling and Planning, 32(2), 294-310. https://www.afcpe.org/news-and-publications/journal-of-financial-counseling-and-planning/volume-32-2/financial-risk-tolerance-before-and-after-a-stock-market-shock-testing-the-recency-bias-hypothesis/
The Financial Literacy Group (2021). Game changer: The evaluation of the Jump$tart Financial Foundations for Educators professional development program. https://3yxm0a3wfgvh5wbo7lvyyl13-wpengine.netdna-ssl.com/wp-content/uploads/2021/07/Game-Changer-JSFFE-Impact-Study.pdf