How does personality impact on investment decisions?

Research indicates that personality differences can impact on the types of investments selected by an individual, the biases they are prone to, and the risk they are willing to take in their investment decisions.

Some investors prefer to research and understand the viability of an investment based on various information such as how a company has performed in the past, how they have reacted in times of volatility and their future business plans; while other investors are more willing to be impulsive or take a risk on speculative projected performance.  Another group of investors may simply be happy to invest in lower risk bank deposits.   It is likely that your personality plays a part in what types of investments are attractive to each individual.

Investment personality types have been broken down by Pompain, M.M. (2012) into four types: the Preserver, the Follower, the Independent and the Accumulator. Understanding your personality can provide an individual with an awareness of your natural views towards investment risk and decision-making, and any  biases that may prevent you from reaching your financial goals.

What investor personality type are you?

The Preserver– an individual with this personality will have a below-average risk tolerance, will be fearful of losses and will place a great deal of emphasis on financial security. They will usually follow a conservative investment strategy and will have emotional biases towards loss aversion and keeping the status quo.  They may be willing to forgo the greater returns that a more aggressive portfolio may provide, as their primary motivation for an investment strategy will be capital preservation rather than taking risks to grow wealth.  It is important for a Preserver to understand their natural bias to loss aversion which can result in an overly cautious approach to investments which misses out on the benefits of a more balanced portfolio.

The Follower – these individuals will make investment decisions based on the here and now, and a fear of missing out. They are likely to change their portfolios based on changing markets, investment fads and what their friends and colleagues are doing. They often second-guess their investments and make frequent changes resulting in increased fees and reduced returns. Due to their more unstructured investment nature, they may not adequately consider risks, and are likely to miss out on returns from investments that require a longer-term outlook.  They may be prone to investing at exactly the wrong time due to biases towards recency and herd mentality.  In recent times, with the rise of investing blogs, we have seen Follower investors drive some companies significantly beyond fair valuations before crashing.

The Independent – this is someone who is confident in their investment decisions, likes to be involved in the investment process and will rely on their own research and ideas.. They think independently and trust their investment research, but can make decisions based on ‘hard’ facts without second-guessing them. They are usually less risk averse than others. Independents can be prone to confirmation and availability bias where they will pay closer attention to  information that supports their decisions and disregard information that does not. This may result in Independent’s acting too quickly without doing adequate research, and they will not be willing to admit when they make investment mistakes.

The Accumulator – this individual is confident in their ability to make good investment decisions, have usually been successful in their careers and are motivated to accumulate wealth over time. Due to their prior life successes, they are likely to believe that they will also be successful in making good investment decisions. Accumulators are willing to take risks in their investments, will be confident in their choices and will be keen to make their own decisions. On the flipside, Accumulators often demonstrate an overconfidence bias which can be detrimental to long term investment outcomes.  Overconfidence can lead Accumulator’s to overestimate their investment knowledge, disregard expert advice and make risky decisions without consideration of portfolio diversification

How can a financial advisor help?

In practice, putting people into personality buckets is difficult, as most people will have traits that overlap into more than one category.   However, a financial advisor can help you to better understand your investment personality type(s) and provide you with appropriate advice for your situation.

Having a relationship with a trusted financial advisor can also support improved investment decision making, as they will seek to understand your investment personality, natural biases, risk appetite and financial goals. They will be able to create a financial plan that  will give you a high probability of achieving your goals supported by an evidenced based philosophy.

Disclaimer:  This article is general in nature and does not constitute personalised financial advice.   Please get in touch with a Bradley Nuttall financial adviser if you want to discuss this article or your financial situation.

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