Assessing the influence of South African investor well-being on risk tolerance

Abstract

Investment companies have the responsibility to develop and evaluate investors’ risk profiles to gain insight into and determine which financial products would best suit their investors’ respective needs. It is vital for these investment companies to investigate relevant factors and imply appropriate statistical techniques to measure an investor’s risk tolerance as accurately as possible. The primary objective of this study was to assess and model the influence of South African investor well-being (financial well-being, satisfaction with life, and physical activity) on risk tolerance. In order to attain the primary objective of the study, respective sets of theoretical and empirical objectives were established. The theoretical objectives allowed the researcher to review in-depth discussions on several important concepts including risk tolerance, financial well-being, satisfaction with life and physical activity. Based on the theoretical framework, it can be implied that socioeconomic factors along with the respective elements of investor well-being have an influence on the risk tolerance levels investors are willing to take. A quantitative research design with a complementary positivist research paradigm was utilised to achieve the empirical aspect of the study. A secondary data analysis (SDA) allowed the researcher to re-examine and interpret the secondary data from a new perspective. The target population were investors who had held an investment portfolio at a reputable South African investment company. The final sample size consisted of 1 065 investors, of which 596 were female and 469 were male. The following scales’ data were investigated and discussed: Grable and Lytton’s 13-item risk tolerance scale (GLRTS), Survey of Consumer Finance (SCF), InCharge Financial Distress/Financial Well-being (IFDFW), satisfaction with life scale (SWLS), and the International Physical Activity Questionnaire (IPAQ). Statistical analysis techniques such as factor analysis and structural equation modelling (SEM) were utilised within the study. The data were analysed through the use of the IBM Statistical Package for the Social Sciences™ (SPSS) as well as AMOS™; both Version 25. The following results regarding the demographic factors, risk tolerance, and investor well-being were established: (i) age has a statistically significant, positive relationship with each element of investor well-being; (ii) income and education both have respective, positive and statistically significant relationships with financial well-being, satisfaction with life, and risk tolerance; (iii) gender’s influence on risk tolerance, financial well-being, and satisfaction with life is statistically significant; (iv) race and marital status has no practically significant differences on risk tolerance and investor well-being; and lastly, (v) some place of origin categories have respective large and practically significant effects on risk tolerance, financial well-being, and physical activity. The main findings of the study suggest the following: (i) risk tolerance has statistically significant and positive relationships with the respective elements of investor well-being; (ii) financial well-being has a positive and statistically significant relationship with satisfaction with life; and (iii) financial well-being, physical activity, gender, and income each have a positive and statistically significant influence on risk tolerance. The empirical findings of this study may help investment companies and financial institutions to assess their investors’ risk tolerances through a different viewpoint. The SEM will enable investment companies and financial institutions to forecast the factors that will influence an investor’s risk tolerance level; and ultimately the type of financial products the investor decides to invest in. By forecasting investors’ risk tolerances, investment companies and financial institutions will be able to take competitive advantage of the opportunities that occur by providing accurate investment advice and strategies to their clients. Considering the theoretical and empirical findings of this study, a few implications and recommendations can be offered. Researchers can in future explore other factors that may have an influence on risk tolerance; moreover, different primary data and different research designs can be implemented to test whether the results are similar or different to that of this study. Ultimately, this study adheres to the ethical academic research standards prescribed by the North-West University.