Focusing a client’s investment on his goals can both increase total returns and help motivate the investor for a long time. Goal-based investing is simple, ask the investor to list all his goals, and then use that knowledge to generate an appropriate portfolio.
However, there is a problem. In a recent study conducted, it was found that when we simply ask people what their highest priority investing goals are, the response we receive often isn’t real/ actually what they want. It’s probably what the person happens to be thinking about at the moment, rather than a strong statement about his actual long-term goals.
Thankfully, gaining a more deep understanding of a person’s goals isn’t difficult; it just takes a different approach.
Asking About Goals
In a 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. 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.