30 May Knowing your Investing Personality: Part II
In our second attempt to look at how our investing personality impact the way we invest, we look at the psychology based concept of behavioural finance. Behavioural finance studies shows that our imbedded personality traits along with emotional and mental behavioural biases contributes to the “how and why” when we take important financial decisions.
In a research report released by CFA Institute, investors are categorized on four different types based on their behavioural biases. This blog focus on the four types and the common issues they face with investing.
Preservers focus on preserving wealth rather than taking risks to grow wealth. They are anxious about losses and short-term performance. Preservers also have trouble taking action for fear of making the wrong investments decisions.
An ideal investment strategy should be segregated into short, medium and long term goals. By focusing on short term returns, preservers risks making an emotional decision based on the short-term performance, which may end up being more detrimental to them in the long run. So if you identify yourself as a preserver, clearly define your three different stages of goals and create a plan around it.
Accumulators are confident investors who want to be actively involved in making investment decisions. They are risk takers and typically believe that whatever path they choose is the correct one.
The issue with accumulators are overconfidence as they consistently overestimate their ability to predict future returns. History has shown that it is impossible to predict markets at large scale, yet accumulators continue to try and do so and expose themselves to extreme risk. So, if you are an accumulator, be honest with your risk taking ability. In other words, put a cap on how much you can afford to lose or how much return you are happy with and be disciplined with it.
Followers may lack interest and/or knowledge of the financial markets. Hence their decision-making process may lack a long-term plan. Followers are investors who tend to follow their friends and colleagues advise or follow the current trend.
The issue with followers is that they follow the herd mentality, a concept of investors piling into the same investments as others. This is often the basis of investment bubbles and subsequent crashes in the stock market. If you are of a follower personality, it is time for you to invest in yourself and understand your investment decisions and how they fit into your overall plan. Get familiarised with terms, concepts and understand the “why” behind investing in the asset rather than simply relying on other’s advice on investing.
Independents are engaged investors who have their own ideas about investing. They are often analytical and critical thinkers and trust themselves to make confident and informed decisions, but risk the pitfalls of only following their own research.
Similar to overconfidence bias associated with accumulators, independents face similar issues with relying too heavily on themselves. It is always a good idea to have a second opinion, look at market consensus and then settle on an investment decision.
In summary, it is important to understand your investing personality, develop a three-fold strategy, empower yourself with knowledge and then execute your decisions.
As we at Investify always say “ No one cares about your money more than you do”.
So, what kind of investor are you?