Your personality affects many things in your life — whether you’re shy or outgoing, which activities you enjoy doing, how well you get along with your coworkers. But does your personality affect your investment decisions? Researchers are finding that certain psychological traits — rather than logic — frequently influence investment decisions.
Could your personality be interfering with your investment success? Check out the hypothetical investors described below.
Fearful Fran
Research shows that investors typically are more upset over investment losses than they are happy about gains. Fearful Fran is no exception. Her reaction to falling prices has had a big impact on her portfolio. As soon as she experiences a small loss, Fran moves her money out of the market, thinking she’ll reinvest when the market rebounds. While no one likes to lose money, Fran risks earning lower returns by selling than she might get if she waited out the downturn.
Instead of moving her money around with every market fluctuation, Fran should examine her risk tolerance and time horizon and choose an appropriate mix of investments for her portfolio. When she does make changes, she should be sure they fit in with her overall investing strategy.
Confident Carl
When it comes to making investment decisions, Confident Carl constantly overestimates his abilities and the accuracy of the information he receives. He trades investments often, trying to increase his returns. But, instead of earning higher returns, Carl’s frequent trading often leads to losses, higher transaction costs, or significant tax liabilities.
Carl can remedy his habit of overtrading by having a well-thought-out asset allocation* that he sticks with over the long term. By keeping track of his returns and transaction costs, Carl will be able to see how much money his frequent trading costs him. And knowing how his investments have historically performed can help Carl determine if his expectations are realistic or if he has exposed himself to more risk than he’s comfortable with.
Here-and-Now Hal
Here-and-Now Hal’s immediate financial needs take precedence over his long-term goals. Saving for his new home, for instance, is more important to Hal than saving for a retirement that’s many years in the future. Hal places a high priority on the present and puts off saving for other things. If Hal’s not careful, his procrastination may keep him from achieving the kind of retirement he’d like to have.
To avoid coming up short at retirement, Hal should have a specific amount of money automatically deducted from each paycheck and invested in his employer’s retirement plan or other investment account. A regular savings program can help keep Hal on track to accomplish all of his goals — not just the ones around the next corner.
Haphazard Harriet
Haphazard Harriet has a willy-nilly approach to investing that keeps her from rationally evaluating her investment decisions. For example, she may buy a stock simply because its price has fallen and seems “cheap” relative to its former cost.
Before Harriet invests, she should investigate the reasons for the price decline and evaluate the stock to determine if it’s really worth owning. Then she should write down the reasons for her purchase and review them periodically to make sure the investment is performing as she expected. Having a well-planned investment strategy can keep Harriet from making impulsive decisions that could lower her returns.
Your financial professional can help you make investment decisions based on your goals.
* Asset allocation does not guarantee a profit or protect against losses.