Morningstar - Q2 2024 - 17

EXHIBIT 1
trends: business development companies,
commodities, cryptocurrency, private credit, private
equity, REITs, semiliquid interval funds, separately
managed accounts via direct indexing, and
structured products. We surveyed 948 US investors
not yet in retirement about these trending
asset classes via the online Prolific platform.1
We first queried them about how knowledgeable
they thought they were about each of the
nine asset classes. For each asset class that
investors indicated they at least had encountered
in passing, we asked them whether they owned
the asset and whether they were planning
on increasing, decreasing, or keeping the same
amount of their holdings in the asset. For those
who said they planned to change their holdings,
we asked them to explain why. Investors'
rationale for why they wanted to change their
holdings was coded using a scheme of common
investing motivations, including accessibility,
confidence, curiosity, customization, diversification,
liquidity, macroeconomics, returns, social, taxes,
transparency, timing, and volatility.
Two human raters then independently coded
a subset of 20% of the responses to establish
inter-rater reliability. Next, the two raters resolved
any codes where they disagreed to create a
" gold standard. " From there, we developed a series
of prompts for each code and input them into
the ChatGPT 3.5 Turbo artificial intelligence
platform, which coded the rest of the responses.
To ensure the validity of the AI's codes, the
prompts were tested against the gold standard
to establish reliability before coding the rest
of the data. The AI then coded the remaining data,
using majority rules over three trials.
Knowledge and Ownership of Assets
In our sample, more than half of participants had
never heard of business development companies,
direct indexing, semiliquid interval funds,
or structured products. Participants had higher
levels of knowledge of commodities, REITs,
private credit, private equity, and cryptocurrency.
Cryptocurrency stood out: Almost 80% of
participants said they had at least recognitionlevel
knowledge of crypto. This is a concern
because investors could mistake such knowledge
for a deeper understanding of the asset
class. Commodities, cryptocurrency, private equity,
and REITs had the highest ownership levels.
The chances of owning an asset class increased
with stated knowledge, increased for those
who have an advisor, and decreased with financial
literacy. This final finding is concerning
because it suggests that those with a lower
understanding of financial matters are more
likely to be drawn to trendier assets. Furthermore,
even though these individuals have lower
financial literacy, they reported higher rates
of stated knowledge, suggesting some level of
overconfidence bias.
The Changing Appetites for Trending Assets
Overall, we found that investors don't have
a desire to change their investments in these
trending assets. The most common response
across each asset class indicated that investors
who did not already own the asset were
not planning to buy it. The second most common
response pattern indicated that investors
who already owned an asset were not planning
to increase or decrease their holdings-which
suggests that after entrance into ownership,
these assets have some stickiness.
The most common reasons investors gave for
wanting to change their holdings were
returns, confidence, macroeconomics, and timing
( EXHIBIT 1 ). A general picture emerges: Investors'
trade decisions often seem to be prompted
by short-term thinking that is overly focused on
the present market performance.
The Importance of Advisors as Behavioral Coaches
In general, the explanations investors gave for
their desire to change their investments did
not differ based on their background. But investors
who worked with an advisor were less likely
to cite macroeconomic events. This points to the
Frequency of Reported Motivations for
Changing Investment
Category
Returns
Confidence
Macro
Timing
Diversify
Volatility
Payouts
Customizable
Social
Curiosity
Government
Liquidity
Accessibility
Taxes
Transparency
Source: Morningstar.
3
2
60
120
13
13
11
11
9
7
Count
114
101
76
63
39
35
21
importance of advisor guidance, which often
entails the behavioral coaching investors
need to put on blinders to the news and focus
on their long-term financial plans.
It's clear that many investors are interested in
trends. Advisors can play a key role in educating
their clients. To guide these conversations,
advisors should focus on making sure the clients
fully understand the asset, uncovering the
client's motivations for pursuing these assets,
and ensuring that the asset can work within the
client's financial goals.
Danielle Labotka is a behavioral scientist at Morningstar.
Samantha Lamas is a senior behavioral researcher
at Morningstar.
1 Investors were defined as individuals who reported that they owned at least one of the following items: employee-provided retirement account, individual retirement account, mutual funds,
stocks, exchange-traded funds, money market funds, brokerage account, health savings account, annuities, or cryptocurrency. On average, investors were 39 years old and reported having
$212,346 (median: $50,000) in assets and an annual salary of $112,402 (median: $90,000). The data was collected in December 2022.
morningstar.com/products/magazine
17
https://www.morningstar.com/people/danielle-labotka https://www.morningstar.com/people/samantha-lamas http://www.morningstar.com/products/magazine
Morningstar - Q2 2024

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