You are biased. We all are. Whether this is due to our nature or how we were nurtured, we tend to interpret the world in a certain way. These biases can help or hinder us when making savings and investment choices. Knowing our strengths and weaknesses can help us see more clearly.
Openness, conscientiousness, extroversion, agreeableness, and neuroticism (and their opposites) are the five basic personality traits that some psychologists use to build a picture of people’s characters. Using personality tests (take a free one here) we can see where we sit on the spectrum for each of these five.
Our character influences our behaviour as investors, crucially regarding our attitude to the trade-off between risk and reward, and our willingness to build a strategy and stick to it long term. The golden rule for everyone is start saving and investing early, and regularly. Beyond that, finding a strategy that suits your personality is the key to maximising peace of mind as well as return.
People who tend to be “open” tend to be adventurous, creative, agile investors, who are able to take the rough with the smooth as they pursue long term financial rewards. However, taken to the extreme this can tip into impulsivity, meaning that highly open people can find it hard to stick to the goals and strategy they have set themselves.
Highly conscientious people are more likely to be self-disciplined regarding financial routines, setting clear goals and a strategy, then sticking to this. Some are perfectionists who have a keen eye for detail and a desire for deep understanding before making a decision. However, over perfectionism can mean wasting time reworking less important details.
Energetic, assertive extroverts often self-generate positive emotions, which gives them a can-do attitude. Being sociable means they are more open to hearing good investment ideas. This trait needs to be controlled if it is not to become a tendency for overconfidence and impulsiveness.
People who measure high on agreeableness tend to favour responsible investing or ESG financial products, backing young or startup entrepreneurs, and seeking philanthropic options. They might be willing to sacrifice financial return for social and economic impact. Taken to excess, though, this trait could morph into gullibility for attractive sounding schemes. Conversely, those low on agreeableness might tend to be fully focused on maximising their financial earnings.
The fundamental rule of investing is to set a balanced strategy based on one’s means, and stick to this over the long term. But for highly neurotic people watching the value of a portfolio fluctuate can provoke stress and anxiety, and maybe the premature abandonment of plans. The flip side is a willingness to be vigilant and to make solid arrangements.
“The worry of managing substantial wealth built over the years can become somewhat neurotic,” said Laurent Simeoni, head of portfolio management services at ING. Maybe also being high on the neuroticism scale helps entrepreneurs create wealth, given that their nature drives them to be attentive to detail.
“Our job as advisors is to listen to client concerns, and then build strategies around these. By being transparent and professional we help to put their minds at ease,” he added. However, this doesn’t prevent certain activist clients from wanting substantial, frequent input. There are no clear-cut answers that suit every personality, and every mood.