Practical analysis for investment professionals
20 January 2015

Are You an Investor?

Posted In: Future States

Are you an investor? It is a simple question that a surprising number of individuals answer incorrectly.

A recent survey of defined contribution (DC) retirement plan members was conducted by State Street Global Advisors (SSgA). SSgA polled more than 2,000 plan participants in the United States, Ireland, and the United Kingdom to provide “insights into the unique needs of participants in different countries.”

The survey produced a variety of noteworthy results which underscored the fact that many retirement investors are concerned not only about their ability to amass enough capital for retirement, but also about their ability to manage their investments effectively. In fact, only 22% of respondents rated themselves as “very or extremely” knowledgeable about money matters like savings or investments.

One of the issues that plagues investor education and financial service professionals, who are focused on educating retail investors and have a vested interest in a better-informed client base, is that many individuals don’t perceive themselves as investors. They don’t see themselves as needing investor education or information that can help them to become better investors. According to SSgA, “the latest DC survey highlights again that DC members principally view themselves as savers, not investors.” This perception problem not only reduces engagement with personal finance and investment management tools, it also explains many other issues, like why some investors are reluctant to take on the additional risk to realize the higher returns necessary to achieve their retirement objectives.

Investor Misidentification

It is pretty clear that contributors to DC plans should consider themselves investors. Although the SSgA survey was limited to DC members, I think it is safe to say that this perception issue is prevalent among other types of investors as well. So, in order to get individuals to identify themselves as investors so that they take advantage of opportunities to become better ones, what constitutes an investor? When CFA Institute and the Future of Finance initiative talk about creating more transparent and equitable capital markets for the end investor, who are they talking about?

Searching for the definition of investor, the most common seems to be:  a person who allocates capital with the expectation of a financial return. Although it is somewhat limiting, this definition still covers a significant amount of people that may not consider themselves investors.

Take homeowners for example. Yes, most may have an expectation of receiving a financial return, although their primary reason to buy a home — to secure a place to live or to hedge against inflation and the potential increase in long-term rental rates — may have been something other than the eventual growth in their equity stake. Considering that for many the equity in their home is their single largest asset, lots of homeowners still don’t identify themselves as real estate investors.

How about those individuals whose greatest financial asset is their bank deposits? Are they investors? Although they may be expecting financial return, a greater goal might be liquidity, access, or capital preservation. Because FDIC insurance in the United States limits depositors’ downside risk, this feeling of safety may also hinder awareness of the impact market forces like changing interest rates and inflation may have on depositors’ potential financial return or the purchasing power of their capital.

Depositors in other countries may feel differently. For example, the recent monetary crisis in Russia forced many bank depositors to act as investors in order to hedge the reduction in the purchasing power of the ruble, which can be considered a basic investment management tactic. Many Russians transferred cash into other assets, in some cases depreciating ones, because they felt that they would depreciate at a slower rate than their currency. Those that felt or acted like investors may have fared better than those who identified as savers or simply sat back and waited for market regulation or equilibrium to fix the issue for them.

Need for Perception Change

There is a great need for individuals to increase their knowledge of personal finance and investment management to better their financial lives and to amass enough capital to achieve long-term financial goals. Although ameliorating, global financial and investment capability continues to be dreadfully low. This lack of financial knowledge continues in the face of significant investor education and financial literacy efforts by both public and private organizations. Although many individuals have access to some type of personal finance or investment education content, there seems to be little engagement with it in relation to the amount of content available.

Knowing this, how do we prepare individuals to deal with risks that affect all of their financial assets? One necessity is to convince those who are affected by market forces to identify themselves as investors. Before we can expect individuals to care about both market and asset-specific risks, we have to change people’s perceptions of what it means to be an investor. Until we change the definition, and find a way for those who engage with financial institutions to internalize it, investor education professionals and other stakeholders in furthering financial education will find it continually difficult to make an impact.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Robert Stammers, CFA

Robert Stammers, CFA, is director of Investor Engagement for CFA Institute and is responsible for increasing the use and distribution of Future of Finance and CFA Institute content by various audiences. Prior to joining CFA Institute, Stammers was the principal for his founded company where he consulted for real estate owners, lenders, and syndicators to develop and analyze structured real estate investments. There he devised strategy for obtaining debt and preferred equity capital and created finance-related marketing materials and research papers for various clients. Stammers has authored over 100 articles on various financial and investment topics for such investment periodicals as Forbes and Investopedia. He served as a senior equity analyst, where he was responsible for the creation of new investment tools and instructional products to provide the revenues for two new investment education companies. As a senior executive for several institutional fund managers, Stammers was the portfolio manager for a $1 billion enhanced real estate fund, a $1.2 billion private timber fund, and several pension fund separate accounts.

2 thoughts on “Are You an Investor?”

  1. Maybe they would feel more like investors if the plans let them know how administrators are voting their proxies. Then they could see how they influence the companies as shareOwners.

  2. How can we expect individual DC owners to view themselves as investors when the vast majority of the people who “advise” them are not investors? What percent of the 400k odd “financial advisors” out there are professional investors? Aren’t most of them professional salespeople? And without an interest in practicing Fiduciary Responsibility, are these “financial service professionals” who follow the Suitability Rule really interested in “educating investors?” What % have a “vested interest in a better-informed client base” when their compensation is tied to sales commissions?

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