Investor Behavior: Risky Moves Among the Financially Free and Financially Surviving Alike

This year, we will be presenting a series of articles discussing results of studies of investors and their financial behavior. These articles can help provide insight to our financial advisor readers about how to best communicate with their current and prospective clients. Keep following us for more of these articles in the future.
‍

A new study released this winter from M1 Finance, a FINRA-approved platform run by Brian Barnes, should ring warning bells for any advisor with younger clients or anyone with a challenging retirement plan. M1 Finance’s research focused the financial behavior between two distinct groups, those it says have “reached financial freedom” and those who are in “a state of financial survival.”[1] M1 defines financial freedom as “having enough savings, investments and cash to live the life an individual wants, across their family, career and future plans.”[2] Financial survival is defined as “being worried about covering basic living expenses (food, shelter, clothing).”
‍

While several news outlets picked up the survey, like Axios, Yahoo and Better News Bureau, they did so without much analysis. For example, most financial advisors’ focus would be on emergency funds for the financially worried investor.[3] We agree; we’ve discussed how to talk to clients about saving for a rainy day before.[4] Some retirement plans are even beginning to use auto-enrollment to ensure their employees have an emergency savings account.[5] And yet, the financially surviving were asked in M1’ Finances study only about investing, not about saving. Rainy day funds or not, the results from M1 Finance’s study point to very distinct financial behavior between the two groups.
‍

The study found that 50% of investors who define themselves as being in a state of financial survival reported that they are trading more often now than they did in 2020. Trading too frequently can have major consequences – not only do investors lose money on fees, but they also lose focus on long term strategy positions.
‍

They study has some other alarming results. Those who reported that they are in a state of financial survival were “more likely to invest in alternative assets, including more volatile asset classes like cryptocurrency. 73% of those in financial survival plan to invest in some form of alternative asset in the next 12 months, compared to only 54% of the financially free. Those in a state of financial survival are twice as likely to invest in art or collectibles (20%) in the next 12 months as the financially free (10%).” In other words, the financially unstable are may be taking financially unsound steps towards building retirement income.
‍

There’s also a bit of a hidden story in these new figures from M1 Finance that news sources seem to have missed. While M1 Finance reports that financial survivalists are less likely to use long-term oriented strategies like growth investing, diversification, buy and hold and dividend investing than the financially free, those who say they are free aren’t necessarily also footloose and fancy. The comparison numbers point to an alarming trend. Dig into them and instead of noting that 14% more of the financially free rely on long-term growth investing - at 45% of the freedomers to 31% of the survivalists- that’s still less than half of those who are financially secure using growth investing as one of their top investing strategies. That could be because there has been a significant drop in the number of Americans who consider themselves as “financially healthy.” “Still, a recent survey from retirement services provider Empower Retirement and financial services company Personal Capital finds that only 34% of Americans consider themselves ‘very financially healthy,’ a 14% drop from March 2021.”[6]
‍

With confidence in their financial health eroding for many Americans, now may be a good time for financial advisors to use their voice. As analyst and CEO Edmund F. Murphy III stated: “[p]eriods like this represent opportunities for savers to become even more engaged in their finances and seek the advice they need to help reassure them in their financial plan or put them on a path to help drive renewed confidence.”[7] His call for advice should be considered strongly as data shows that “over half of all Gen-Z and Millennials stating that they have taken an investment action as a result of social media.”[8]

‍

‍

‍

‍

‍

‍

[1] https://www.m1finance.com/why/newsroom/financial-wellness-survey-release
“This M1 Finance survey was conducted by ENGINE Caravan among retail investors in the United States with at least $10,000 USD in investable assets. A diverse group of over 2,000 investors were surveyed for the report, fielded throughout November 2021.”

[2] Don’t look to M1’s own page for this definition - it’s website didn’t link the footnotes. Instead find that definition in other sources like Yahoo
https://www.yahoo.com/now/long-term-investors-more-likely-123000481.html

[3] https://www.equifax.com/personal/education/life-stages/build-savings-vs-retirement-savings
https://www.cnbc.com/select/why-you-shouldnt-invest-your-emergency-fund

[4] For advisors, we’ve covered emergency funds here:
‍https://www.bcgbenefits.com/blog/saving-for-a-rainy-day-5-methods
and for our plan sponsor readers we’ve covered emergency funds here: https://www.bcgbenefits.com/blog/the-unexpected

[5] Some new plan designs will auto-enroll plan participants in a savings account whenever they make a loan from their retirement accounts.

[6] https://www.yahoo.com/video/much-money-feel-financially-healthy-220515160.html

[7] https://www.yahoo.com/video/much-money-feel-financially-healthy-220515160.html

[8] https://www.m1finance.com/why/newsroom/financial-wellness-survey-release

‍

‍

‍

‍

‍

‍

‍

‍These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.