02/11/2014 12:24 EST | Updated 04/13/2014 05:59 EDT

When it Comes to Finances, Canadians Believe One Thing and Do Another

With the Canadian debt-to-income ratio at an historic high, one can only hope that our collective access to information is enabling Canadians to do a better job at aligning their actual behaviours with their stated goal of debt reduction in 2014.

With the RRSP season upon us, the financial media abounds with stories on what investment options you should consider, how much money you will need to retire and why you should save as much as you can. What are not as common are stories about how well we're doing at incorporating all this information into our real world decision-making. A new study indicates that may be warranted, however, as it reveals a striking disconnect between our stated financial principles and our actual behaviours.

What's worrisome is the possibility that this disconnect might apply to our overall debt and financial management as well. If so, that is something Canadians would be wise to address.

The study, for the Investor Education Fund (IEF), found that only 60 per cent of investors indicated that they made investment decisions based on thorough analysis. This left 23 per cent stating they made their decision based on a mix of some (limited) analysis combined with "gut" instincts and 17 per cent (not far off of a quarter of respondents) saying they did so on purely on their "gut" instinct!

More curious in the report's findings, however, were the contradictions between peoples' stated risk tolerances and their actual investment behaviours. As an example, an astounding seven in 10 respondents who identified themselves as 'high-risk' investors actually owned "low-to-medium-risk" investment products. This disconnect was more than subtle, leading the IEF President to state "self-perception and behaviour is a bit out of whack."

This gap between perception and reality is compounded by the fact that only a third of the study's respondents thought their lack of investment knowledge was even a problem for their financial planning. It seems that most of them had some form of investment advisor, so they felt that negated their personal lack of knowledge. This led the IEF President to point out that "you have to know something even to interact with an advisor." He might also have reminded people that it's their money and their future, so there is good reason to become better informed.

This is one study, however, and it examined peoples' financial beliefs and behaviours regarding their investments. Does this really have any broader implications for their overall financial management, let alone their debt management, capabilities? Well, maybe it does, as it speaks to the highly influential role our emotions and self perception play in our finances, not 'just' the technical knowledge component that is usually reported upon. As 'perception is reality', maybe we need the financial media to focus on these perception variables in equilibrium with stories of market trends and investment strategies.

This thought was raised in a recent story by MSN Money (Canada) entitled "Take Off the Rose-Coloured Glasses, Generation X and Generation Y." The story reported on a Bank of Montreal report that found young adults and teens may be overly optimistic about their ability to face the financial obligations that await them in their future.

As illustration, the BMO report found that 68 per cent of those in the Gen X and Gen Y age groups stated confidence in being able to buy a home. Their confidence might be questioned, however, when the average cost of a home currently runs eight times the average full-time annual salary, before taxes! That's up substantially from 1997, when the average home 'only' cost five times the average, pre-tax, annual salary. Of course, the record high personal debt loads Canadians are already carrying, let alone the punishing student debts many are facing immediately upon graduation, would be other reasons to caution those with this assured level of confidence in future home ownership.

Once again, 'perceptions are reality' and many in the Gen X and Gen Y age groups may have perceptions based upon the economics of their parents' generations and a sense that they will naturally enjoy the same opportunities as their parents experienced. They may have perceptions that do not align fully with the current economic, housing market or labour force realities of their own generation.

One has to ask why this may be. Not in the sense of questioning the beliefs of specific generations, but in questioning where these apparent 'disconnects' originate from, given the unprecedented access to information enjoyed in modern society. In an era of information being immediately available at our finger tips, should there not be greater knowledge and insight? Should this knowledge not narrow (to some small extent) the gap between beliefs and actions? At a minimum, should it not better align perceptions with current realities?

With the Canadian debt-to-income ratio at an historic high, one can only hope that our collective access to information is enabling Canadians to do a better job at aligning their actual behaviours with their stated goal of debt reduction in 2014. If the CIBC poll is accurate and paying down debt is the top priority Canadians have for this year, ahead of savings or their retirement, let's hope they have an action plan that will accomplish this goal. With current debt levels, it would be a shame to see the kind of disconnect witnessed in the IEF study on investment behaviours.


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