Why your Emotional Intelligence could save you MONEY?

Evidence from behavioural finance says investment choices and experience are determined by investor Personality and Emotional Intelligence.

There is increasing evidence that links personality types with investment behaviour. While the behavioural economics theorists talk about concepts like ‘myopic loss aversion' (investors experience more pain out of a loss of Rs 100, than the pleasure they experience from a gain of the same amount), users of this branch of economics are classifying investors according to their personality traits.

Research by Senior Lecturer Dr Jeff Pressing and his student Ben Samild, at the University of Melbourne , identifies three broad types of investors found operating in the stock market – the ‘contrarians', ‘trend followers' and ‘hedgers and holders'. The ‘contrarian' buys when the rest of the world sells. ‘Trend followers' are more conservative and tend to invest in products such as bank stocks. The last is the very conservative ‘hedger and holder' – the famous ‘small investor' who wants high return and low risk. Preferably guaranteed by the government.

Merrill Lynch Investment Managers, a global wealth management firm, came to the same conclusion as Pressing and Samild, but they used a survey of investors in the US , whose results in November 2004, classified investors into four major categories (see below).

Researchers in this field have also found that investor personality may differ across asset classes, with more risks being taken with a more familiar category. A person comfortable with real estate may take large risks in property, but may want to stick to a diversified equity fund for his stock market exposure. Alternatively, a conservative investor may rank the risk of loss of purchasing power due to inflation lower than the risk of losing money even in a low-risk equity product.

Reconcile yourself to your investor personality and then let the noise pass you by. For example, if you are a ‘reluctant' investor who does not like to chase ‘hot tips', don't let the noise from the stock market distract you from doing what you like doing, which may be making FDs, not good for wealth creation, but it will let you sleep at night.

Contact the EBW team to gain significant insight into your Persoanlity and Emotional Intelligence

Contact: info@ebwonline.co.uk

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The Measured Investor
Characteristics
• The measured investor starts investing early, enjoys investing and is happy with his or her current financial situation
Strengths
• Regularly rebalances his or her portfolio
• Invests regularly
• Avoids concentration in a single investment
• Is committed to an investing plan
Weakness
• Holds losers too long
• Does not take profits

The Reluctant Investor
Characteristics
• The reluctant investor does not enjoy investing and prefers to spend as little time as possible on his or her investments. However, the reluctant investor is confident that he or she will have a comfortable retirement
Strengths
• Gets rid of investments that are losing
• Avoids concentration of portfolio in a single investment
• Does not chase ‘hot' investments
Weakness
• Invests too little and too late
• Does not invest regularly, even if he or she has the money to do so
• Does not regularly rebalance his or her portfolio

The Competitive Investor
Characteristics
• The competitive investor enjoys investing, but makes a habit of trying to beat the market. This investor is happy with his or her current situation and is confident about the future
Strengths
• Invests regularly
• Starts investing early
• Puts as much money as possible into his or her investments
• Regularly rebalances his or her portfolio
Weakness
• Holds losers too long and does not take profits
• Fails to adequately diversify his or her investments
• Is over-confident and chases ‘hot' investments

The Unprepared Investor
Characteristics
• The unprepared investor tends to put off investing. This investor is not happy with his or her current financial situation and prospects for a secure retirement, and lacks confidence in his or her investment ability
Strengths
• Understands the importance of investing and is willing to learn — even though he or she can be a slow starter
Weakness
• Invests too little, too late and not regularly
• Holds losers too long
• Ignores taxes and expenses
• Often concentrates too much money in a single investment
• Does not regularly rebalance his or her portfolio
Source: Merrill Lynch Investment Managers Survey, Nov 2004

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