How does your temperament play a role in the type of investor that you become? Here we examine how your personality can influence your investment decisions – and why it’s important to build confidence through education, advice and long-term market participation …
In Western Europe, women investors now control roughly a third of total assets under management (valued at some €4.6 trillion), according to research by consulting firm McKinsey & Co. And by 2030, that’s expected to reach 45% of assets under management – a total of €10 trillion.
So, why should women invest? First, it’s about financial equality and independence. Of course, issues, such as the gender pay gap exist, but investing is one of the ways that women can make sure they have the same wealth as men and can avoid issues such as poverty in pension later on in life.
Thus far, the Investment Club has focused on how to start your investment journey, how to be a good investor – but what about your personality? How does your temperament play a role in the type of investor that you become?
Last month, Goodbody Director Laura DeVoy sat down with behavioural science expert Dr Greg Davies, of Oxford Risk, as part of THE GLOSS x Goodbody Investment Club virtual event series to discuss how our personality can influence our investment decisions. Here we present the key learnings and takeaways from the session:
Composure is key!
A lot of investment practice focuses on the notion of risk tolerance – the amount of risk that you’re willing to take in the long term, but it is the concept of composure that is fundamentally important. And that focuses on the amount of risk you are able to withstand in the short term. Remember, we don’t live in the long term, we live in the short term – and there are going to be ups and downs at every step of your investment journey. So, composure is a reflection of how each of us as individuals have a tendency to be emotionally engaged in the present, or a tendency to find it easier to have our eyes on the long-term goal.
There is some form of emotion attached to every point along the investment cycle – and it doesn’t matter where you are, emotion drives a wedge between the thing that feels emotionally comfortable for you to do in that moment and the thing that is sensible for you to do for your long-term financial returns.
So, that gap between doing what is emotionally comfortable and doing what is sensible constantly leads us off course. For example, exuberance might lead you to buy high, while a tendency towards panic may lead you to sell low – and in doing so, you are buying yourself emotional comfort at the cost of generating long-term returns.
It’s also important to have a behavioural mechanism for controlling your impulsivity along your investment journey, particularly if you are a low composure investor and have a tendency to want to do something when you see your portfolio go up, or down. Build in a ‘pause point’ to every investment decision – give yourself 24 hours to sleep on it. Such a mechanism will remove emotion from the decision.
Remember, we don’t live in the long term, we live in the short term – and there are going to be ups and downs at every step of your investment journey.
The confidence factor
When it comes to investing, the largest difference between men and women is confidence. An adverse effect of confidence is reluctance: if you are underconfident, you are likely to be reluctant to start investing in the first place. And the proportion of women who are invested is lower than men – and evidence suggests that this has much to do with the confidence factor.
Conversely, when you are invested, having lower confidence can make you a better investor. As humans, we tend to be somewhat overconfident. So, when we hear that women have lower confidence when it comes to investing, it does not mean that they are underconfident, it means that they are less overconfident. So, how does that translate to investment returns? Once invested, women outperform men on average. That’s because they tend to trade less, as they make fewer bets on their own degree of confidence, while men tend to trade too much, and it costs them.
Don’t try to change yourself!
When it comes to your personality, you should not try to change yourself, but rather recognise who you are and build the tools and techniques to make better investment decisions in spite of or because of who you are.
Remember, confidence is much more important. For example, while risk tolerance may be a trait of your personality, confidence is something that you can build up more easily through experience, education, and the help of using an adviser. All of these things can help bolster your confidence to start your investment journey. Because remember, in the long term, you’re better to be in the markets than out of them (otherwise, your money will start dwindling away at the rate of inflation). If you’ve been building up savings, don’t wait – invest it in a diversified way.
Building emotional comfort
Interestingly, using narratives and stories encourage people to invest. For many, trawling through charts and data of financial risk-adjusted returns is tedious and instead, they want to align their investments with their values. So, talking about the environmental consequences of an investment, or the social good, can catalyse the investment. Indeed, it builds emotional comfort that the money you are investing has meaning attached to it.
ESG investing has brought many investors out of that ‘reluctance’ state as it serves their emotional and financial needs, and they are no longer sitting on a cash pile year after year. If you start talking to people about things that matter to them and how these things will be affected by their investments beyond a risk-return trade off, you are likely to build behavioural resilience, emotional comfortable, and confidence in people – and ultimately, that will make you a better investor.
If you’d like to watch the event, you can access the replay link here.