The authors wanted to see if any such link changed over time based upon demographic factors. Participants were segmented into quintiles by factors such as age, plan balance, income, savings rate and the present of their holdings in equities.
The headline here was that investors in the final decade before retirement showed the most variance in their scores. Their aversion to risk rose more substantially during market declines than other age groups. As you might expect, the result on performance was negative. The changes in aversion caused more “buying high and selling low.”
The authors conclude that the evidence is strong that risk aversion is time varying especially for older workers and that this makes risk coaching all the more important.
On one hand, anecdotally in my practice, the years leading up to a retirement date tend to be among the most anxious for many clients. The clock is ticking and they worry an obstacle like a market correction will appear just as they put the pedal to the metal on their savings. That thinking, however, strikes me as a commentary on risk perception rather than risk tolerance. I’ll be interested to see if other data sets produce similar results.
If risk tolerance for any cohort is not very stable, using even valid risk tolerance results as a significant input for portfolio construction is less advisable particularly if changes in a score are used to make bad portfolio changes.
Imagine if regulators mandated that advisors only use portfolio structures that were mapped from a risk tolerance scoring system with higher scores resulting in more aggressive portfolio structures and lower scores directing to more conservative mixes. (Some jurisdictions around the globe are going in this direction.) If risk tolerance is not fairly consistent and the score declines with a bear market, the new map will point to reducing equity expose. Historically, reducing equity exposure is usually the worst course of action.
Another aspect to risk tolerance that frequently arises in my practice is a significant difference between husband and wife. This difference is one of many reasons I believe there has to be some level of professional judgment and guidance involved when using risk tolerance tools. (The authors of the previously mentioned PlanPlus study noted with much chagrin that only one risk assessment process that included the ability for the advisor to override the results of the questionnaire and document the reason for the override).
The differences between spouses may be why the winning entry in the other category, Best Theoretical Research, got my attention. “Savers and Spenders: Predicting Financial Conflict in Couple Relationships” presented by Sonya Britt from Kansas State asked, “What is the influence of spouse’s perception of spending personality on couple’s financial conflict?”
As is often the case in life both reality (whether one is more of a spender versus a saver) and perception (what one thinks about their spouse and what one thinks their spouse thinks about them) are factors.
Using 2007-2015 Flourishing Family Data, Wave 2 (2008), the top predictor of stressed married men is a “spendy” wife. By contrast, the top predictor of conflict for wives was having a husband who thinks the wife is spendy, whether she is or not.