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  • Writer's pictureLisa Perry

When the going gets tough… find out what kind of investor you are

Updated: May 3, 2023

“I have come to realise that bad times coupled with good reflections provide some of the best lessons.” -RAY DALIO As at the end of the third quarter, global equities were down 25% for the year, global property was down almost 30% and global bonds (traditionally considered a “safe haven”) down a remarkable 20%. A simple global balanced fund, comprising 60% equities and 40% bonds, experienced its worse period in almost a hundred years. On top of this, developed markets are experiencing some of their highest inflation in decades with many countries posting double digit numbers. While the South African numbers are not quite as severe, and some of this is a reversal of the excessive central bank liquidity which artificially inflated all asset prices, there is no denying that there have been few places to hide and that it has been an extremely tough year so far. Reflections and lessons from tough times It is at these exact instances that it is completely natural for one’s emotions of anxiety and concern to be most elevated and for the most common investment mistakes to be made. But each of us are differently wired so it is critical to identify which emotional biases we are most likely to be prone to. Understanding ourselves better is key to managing the emotions we are all feeling. During COVID, we conducted an extensive piece of research with Oxford Risk with over 2,000 individual investors where we asked each about 30 questions. Based on their comprehensive responses we categorised investors into six personality types. The first three categories - comprising about two thirds of investors - display relatively similar characteristics. They exhibited desire for guidance and could be described as either sensitive, skittish or stressed. The second three categories - representing about a third of investors - are more in control and can be described as secure, secluded or settled. Knowing more about each kind of investor can be extremely helpful in managing one’s emotions, especially during volatile markets. Can you spot which type of investor you are?

(see below for some of the tell-tale signs)

  1. Sensitive investors arrive with lots of ideas and are engaged but often struggle to get started. They may be good savers who have accumulated large cash balances, but they are easily upset by short-term, negative news. They have typically not invested enough in growth and risky assets to maximise the probability of achieving their long-term goals.

  2. Skittish investors tend to be older and may follow the latest news closely and be overly concerned about “what if” scenarios and what may happen in extreme events. They are prone to knee-jerk reactions and switching in and out of funds and markets, often at the wrong time.

  3. Stressed investors are worried about their daily finances and are therefore often short-term focused. They can struggle to save and if they have managed to save, they are worried about short-term market movements and taking on investment risk. Their biggest risk is being overwhelmed by the apparent complexity of investing and struggling to get started.

  4. Secure investors are comfortable making their own decisions and enjoy learning about and discussing investments. They are looking to tap into expertise and are aware of the latest fads. They are at risk of confirmation bias and may keep adding new funds or investments to their portfolio because they see these as many, small pockets of calculated risks.

  5. Secluded investors are independent and protective about their own portfolio. They will interrogate any advice and prefer specialist knowledge. It is key for them to see the detail and it is important for them to understand and be familiar with who they are investing with.

  6. Settled investors are comfortable making decisions but they are not particularly interested in investing. They get bored easily and because they find investing a hassle, they may struggle to get around to keeping their affairs in order. They want to hand over all the hard work.

Based on your personality what tips can help you become a better investor? Implementing the simple, practical tips below can go a long way to creating good investment habits.

Sensitive investor

Consider allocating a portion (say ten percent) into a safety pot of risk-free assets like a money market fund. This will give you comfort during market downturns. For new money, you should consider phasing in investments over a period to reduce anxiety and make sure you get started.

Skittish investor

Stick to key investing principles, have a clearly documented plan and scenario plan before you start investing (including how you will respond for down markets, especially early on when you are at most risk). It makes sense to diversify to reduce volatility and to allocate a material portion to passive investments to avoid relative underperformance.

Stressed investor

If you are a stressed investor, your biggest risk is not getting started. It may be helpful to break your investments into chunks and commit to each portion in turn. Regular monthly saving that is automated is a very practical tool.

Secure investor

You run the risk that you keep adding the latest fad to your portfolio. Over time your overall portfolio may become over-diversified with a large, unproductive tail. A practical solution is to allocate a small portion to your “side-projects” to keep your interested and avoid it impacting your overall objective.

Secluded investor

You run the risk of familiarity bias and it will be important for you to see the detail and invest with familiar names. It may be useful to see a detailed look-through of exactly what you are invested in to get more comfortable with investing in new opportunities that arise.

Settled investor

Because you may easily get bored by investments, it is important that you make investing as easy as possible for yourself. Try to automate as much as you can or get someone to do as much of the grunt work as possible so that you don’t neglect important portfolio maintenance.

Find the best investment partner/advisor for you

If you, like most investors, fall into one of the first three personality types, you would benefit most from partnering with an advisor who can provide hands-on guidance on your investment journey. They can take some control over the decision-making process to help you stay the course when it comes to your long-term investment plan.

If you are one of the latter three personality types, you might feel less likely to use an adviser. However, finding an advisor who understands this about you can help you guard against the risks mentioned above to help you achieve better outcomes.

Recognise the power of your emotions

In summary global markets have experienced material corrections which have negatively impacted both the value of portfolios and discretionary spend. Heightened emotions are natural but it’s important to remind yourself that they do increase the risks of making investment mistakes. Depending on each of our own personalities, these mistakes will be different.

The first step is to try to identify which type of investor you are. Then you are well positioned to identify your biggest risks are and what practical actions you can take to prevent those mistakes eroding your long-term financial goals.

“Long-term investment success is almost totally a function of how one emotionally handles declines in the equity market, as opposed to how one’s portfolio handles them.”


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