Analysing risk tolerance during the investor lifecycle

[摘要] Analysing risk tolerance during the investor lifecycle is important to provide financial planners, financial institutions and individual investors with a framework to facilitate the recognition and implementation of suitable investment strategies as well as successful financial and investment planning. The role of financial planners in the South African context is becoming more important as most individuals require the assistance of financial planners to facilitate them with their financial and investment planning. Theoretically, it is believed that individual investors make rational investment decisions and are considered to be rational wealth-maximisers who make decisions to capitalise on available opportunities. Accordingly, South African financial planners and financial institutions assume that individual investors behave rationally when making investment decisions. This is by reason of that individual investors' risk profiles are measured through risk assessment forms that include two elements, namely risk tolerance and risk personalities, but do not take into consideration what risk individual investors cannot tolerate. However, as concluded from this study, it is evident that individual investors within the South African context do not make rational investment decisions. Furthermore, in reality, the level of risk tolerance individual investors are willing to tolerate differs from theory and is primarily reliant on their personal traits and attitudes towards risk. The difficulties that financial planners, financial institutions and individual investors face in recognising and implementing suitable investment strategies often take on preferences that relate to how individual investors recognise risk and behave towards risk. In order to accurately determine individual investors' risk profiles and ensure the successful implementation of investment strategies when making investment decisions, a thorough analysis of risk tolerance during the investor lifecycle is provided. The theoretical objectives provided an in-depth analysis of the risk tolerance and investment decisions of individual investors. A theoretical framework was contextualised that assisted with the achievement of the empirical objectives of this research study. It can be concluded from the theoretical objectives that risk tolerance is an imperative factor that should be taken into consideration when planning individual investors' investment strategies. Also, demographical and socio-economic factors influence the levels of risk tolerance that individual investors are willing to tolerate. Furthermore, it is imperative that individual investors acknowledge their position in the investor lifecycle as it is a vital element in the management of an effective investment portfolio. Moreover, individual investors' asset allocation decisions vary at different phases of the investor lifecycle. The primary objective of this study was to analyse risk tolerance during the investor lifecycle. The research design consisted of a literature review and an empirical study whereby a quantitative research approach and a positivistic research paradigm were applied. The target population for this study was individual investors from an investment company within the South African context. A convenience sampling method was applied whereby the participants were selected based on the ease and convenience in order to attain an unbiased sample. The research instrument was a self-administered electronic questionnaire that was electronically distributed to 800 clients in the data base of the designated South African investment company in order to obtain the primary quantitative data. The investment company through which the questionnaire was distributed determined the sample size. A sample size of 683 respondents was reached and analysed given response rates and time constraints. The demographical information for this study was obtained in order to acquire the necessary background information and socio-economic characteristics of the participants by means of demographic questions. The demographic questions included age; gender; ethnicity; marital status; nationality; home province; home language and annual income. The questionnaire also consisted of questions where the participants were asked to indicate the instruments they have invested in and how long they had invested in these investment instruments. Furthermore, the questionnaire also consisted of the following scales: self-report on lifecycle; Survey of Consumer Finances (SCF) and Grable and Lytton risk tolerance scale (GL-RTS). The results from this study indicated that certain demographical factors have a significant influence on South African individual investors' subjective and actual risk tolerance. Moreover, the level of risk tolerance individual investors are willing to tolerate are not entirely according to theory and depends on certain demographical factors and their perceptions and attitudes towards risk. Individual investors' level of subjective risk tolerance, their perceptions and attitudes towards risk, differs from the actual levels of risk they are willing to tolerate. South African individual investors' perceptions and attitudes towards risk indicated that they are conservative individual investors who are willing to tolerate low levels of risk. However, South African individual investors' actual level of risk tolerance indicated that they are moderate individual investors that tolerate medium levels of risk. Furthermore, it can be concluded that the more positive and greater individual investors' perceptions and attitudes towards risk is; the higher levels of risk individual investors are likely to tolerate. In addition, individual investors' subjective and actual risk tolerance during certain phases of the investor lifecycle deviates and is not completely in line with theory. The insights and findings obtained from this study will contribute significantly towards future research and the financial industry. It will provide financial planners, financial institutions and individual investors with a framework to facilitate the recognition and implementation of suitable investment strategies as well as successful financial and investment planning, not only within the South African context, but also internationally. Holistically, a framework is provided to analyse individual investors' risk tolerance during the investor lifecycle and contribute towards more accurate individual investors' and successful investment strategies when making investment decisions. Avenues for further research can contribute to construct a risk profiling model whereby individual investors risk profile in accordance with the factors influencing risk tolerance, perceived level of risk tolerance and phase in the investor lifecycle can be determined. In addition, the reasons for the difference between individual investors' subjective risk tolerance and actual risk tolerance or the deviation in individual investors' level of risk tolerance and phase in the investor lifecycle can be investigated.

[发布机构] North-West University