Why your investment goals should be flexible

Finding out an investor's goals is a key part of the financial planning process, but what happens when people change their minds?

Steve Wendel 15 February, 2019 | 6:00PM
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One of the first questions a financial adviser asks a client is: what are your goals? Without an end in mind, a lot of saving, investment and retirement decisions can lack focus. And without a concrete target, it's hard to assess whether an investor has succeeded or not.

Typical goals range from the broad, such as "achieve financial independence" to the specific, "pay for my child's education".

Goals-based investing relies on a simple and powerful premise: identify what the investor truly seeks to accomplish and then use that knowledge to generate an appropriate portfolio and improve the investor’s peace of mind. In fact, there’s good reason to believe that focusing on an investor’s goals can both increase total returns and help motivate the investor for the long haul.

But there’s a catch. It all depends on the goals. If the goals used in the financial planning process were meaningful and durable, great. But what if they weren’t? What if the goals that an investor reported to his or her adviser weren’t real?

This can be a disconcerting prospect—both for advisers who explicitly conduct goals-based investing, as well as for those who incorporate that information as part of a more general investing process.

In a recent study that Morningstar’s behavioural science team conducted, we found that when we simply ask people what their highest priority investing goals are, the response we receive often isn’t the definitive answer we think it is.

It’s probably a reflection of what the person happens to be thinking about at the moment, rather than a strong statement about his or her durable, long-term goals. In other words, the answers aren’t necessarily real. Thankfully, gaining a more thorough and considered understanding of a person’s goals isn’t difficult; it just takes a different approach.

In our study, researchers Ray Sin, Ryan Murphy, and Samantha Lamas tested two different ways of asking people about their goals. First, they asked people to simply list their top investing goals.

Second, they asked people to review a list of common goals other investors have and asked them to reselect their top goals, drawing from both their initial list and those common goals. In other words, the second round included a prompt to help people remember other things that might be important to them.

Most People Changed Their Mind

If people could remember and accurately self- report their own top investing goals, then there should be no difference between the two rounds. As you’ve probably guessed by now, that’s not what happened. The results were striking:

  • On average, 26% of participants changed their highest priority goal after seeing the list of common goals
  • Approximately 73% of participants changed at least one of their top three goals

This means that only 27% of the participants didn’t change one of their top three goals. All the others changed their minds when prompted with a basic reminder. Our results highlight a flaw in the traditional goal-setting approach used by financial professionals.

The second approach is known as a “master list”, and researchers have found that it similarly helps people identify their goals in contexts outside of investing.

Our team ran additional analyses as part of this study. For example, they ran the study twice, just to be sure; the results remained the same in both cases. They also looked at how some people initially thought in broad, vague terms about their goals – and how the master list helped them become more specific and vivid.

Many respondents also started out by focusing on financial outcomes and upon further prompting reframed their goals in terms of their emotional and personal value. If there’s one immediate lesson for practitioners, it’s this: use a master list that prompts investors to think broadly about the range of goals they may have for investing.

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About Author

Steve Wendel

Steve Wendel  Steve Wendel is head of behavioral science for Morningstar, where he leads a team of behavioral scientists and practitioners who conduct original research to help people invest and manage their money more effectively.

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