Investor Minute
How Your Personality Can Affect Your Investment Performance
There are some people who would love it if you threw a surprise birthday party for them. They’d enjoy every aspect of it, from the sudden yell of “Surprise!” to being the center of attention to eating cake with a large group of friends.
On the other hand, there are people who think that a surprise party in their honor would be the very opposite of enjoyable. They don’t like unplanned surprises. They don’t want a roomful of people looking at them. And what if the cake wasn’t the kind they liked?
Same event. Two widely divergent experiences. People with different personalities will look at identical circumstances with completely different perceptions. So, it’s not a stretch to say that those same personality differences will play a role in how they make financial decisions—how they perceive risk and reward and how they judge whether or not an investment is good.
Recently, a team of researchers from three universities were able to demonstrate a strong correlation between people’s personality traits and their behaviors as investors. They did this through a survey of 3,325 U.S. investors and were able to confirm their findings by comparing their results with several similar studies done in Europe.
According to psychology, each of us has varying degrees of the Big Five personality traits:
Extroversion, Agreeableness, Openness, Conscientiousness, and Neuroticism. The researchers found that when it comes to financial decision making, several combinations of these traits had an effect on investing behavior.
For example, people with high conscientiousness and extroversion tend to expect a lower probability of a market crash and, as a result, tend to be more willing to make riskier investments.
On the other hand, people with high neuroticism perceive the market as much more risky and are more comfortable with less volatile investments that feel “safer.”
People with high openness and low neuroticism are open to the idea that the market could go up or down, but feeling this risk is appropriate, are likely to invest in stocks and stock funds.
Interestingly, both extroverts and neurotics like to get investing advice from people around them. The first, because comparing strategies is a social interaction. The second, because they have a fear of missing out.
Regardless of how you perceive the market, making investment decisions based on over-optimism or dire pessimism can negatively affect your long-term returns.
A trusted advisor takes into account your personal risk tolerance, along with your unique financial situation, and goals. And when strong emotions threaten to sway your investing decisions, they can also give you valuable, objective insights to help you progress along a plan with the best chance of attaining your desired outcomes.