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Financial advisers are looking more at “behavioural finance” — how people’s thinking affects their money management.Successful saving and investing often comes down to having the right approach. But the right moves to make, on paper, often don’t translate into the actual steps we take. Emotions and personality traits can help or hinder investing and financial planning.
“It is incredibly important, especially if you are a financial adviser, because so much of our industry looks at the really obvious things like age and income and demographics,” says Katie Libbe, vice president of consumer insights for Allianz Life Insurance Co. of North America, of understanding the role habits and personality play. “However, there can be a big difference between a 60-year-old that has a pension but maybe was petty frugal versus a 60-year-old that may have gotten there via day trading and things like that. For financial advisers, it is really important for them to know the differences between emotional traits, values and things that aren’t so easy to discover by just looking at a fact sheet on your client.”
An Allianz study, Reclaiming the Future, included research into how financial personalities affect retirement planning. That effort included a nationwide survey of 3,257 U.S. residents ages 44 to 75.
The report describes this group as “pragmatic and grounded,” and their portfolios show that. “They are financially independent, they are comfortable taking risks and they are confident that their income will last throughout their lives,” it says. “They tend to have large, diversified portfolios and, therefore, few financial concerns.”
Another grouping with positive traits were dubbed “savvy.” They were described as “financially sophisticated,” confident and “in the know about most financial concepts.” They typically had the highest level of investible assets among the respondents, with large, diversified portfolios and the lowest level of debt. As a result, they were also the best prepared for retirement.
Even positive traits can have a potential downside, though.
In 2004, Merrill Lynch commissioned a study of investing personalities and investment mistakes.
Nearly one-third of those it surveyed were categorized as “measured investors.” Secure in their financial situation and confident they will have a comfortable retirement, they started investing early in life, rebalance regularly and don’t try to beat the market or over-allocate to a single investment. The study says they were “least likely to be plagued by the emotions that commonly cause investment mistakes, fear and anxiety.”
Nevertheless, “even the most methodical and even-keeled investors make mistakes,” the study said, adding that “steadfastness is a virtue — up to a point. This personality type’s dedication to their investments often makes it difficult for them to let go of losing investments.”
Libbe says it is important to realise that investing mistakes related to mindset and habits are far from unique.
“Investors need to be able to understand that they are not that different from other people like them and that there are things they can be doing to get back on track,” Libbe says.
The following are five personality traits that can hurt your investments and financial planning:
In the Allianz study, the “overwhelmed” personality made up the largest segment of its respondents (32%) and, demographically, tended to have the lowest income and education level. One-third had been affected — directly or indirectly — by job loss, and they have a limited amount of investible assets.
“This group tends to have high credit card debt and meager assets,” the study says. “As a group, they tend to be somewhat pessimistic … feel unprepared for retirement” and are “unsure of when, or if, they will be able to retire.” Allianz also describes this population as, financially speaking, “in survival mode.”
All this angst doesn’t seem to be helping people with this personality trait get on track.
“[They] have not done a lot of financial planning and, unfortunately, do not yet see the value in working with financial professionals, whom they generally do not trust,” the Allianz study says.
“The difference between [them and those characterised as resilient] could simply be to decide, ‘I’m not going to give up, I’m going to get engaged, get on a plan, be more focused and do something about this,'” Libbe says. “That could start to flip you from overwhelmed to resilient.”
“Resilient folks took a big hit during the recession,” she adds. “They had done the right things, they saved in their 401(k) and put money away, and then got hit by the turbulence in the markets, had to pick themselves up, dust themselves off and start back at it again. The difference is that the ‘resilients’ became engaged, whereas the ‘overwhelmed’ had self-fulfilling prophesies. If you think there is nothing that can be done for you, then you don’t do anything.”
A similar segment — 7% of those surveyed — were “distracted” personalities, many of whom are in their late 40s or early 50s and likely to be married with young children.
“Caught up in the complexity of modern life, they tend to not focus on financial planning, thinking of retirement as being far off and even hard to imagine,” is how the Allianz study describes them.
They tended to have the highest income level of those who took part in the survey, the second-largest level of investible assets and live in more expensive homes in metropolitan areas. Although many saw their net worth drop significantly as a result of the economic downturn and cut back on spending, most have not changed their financial plans or reevaluated their overall financial strategy.
Allianz found that respondents displaying this personality trait expect to retire in their early 60s but would prefer to do so in their early 50s. Most are counting on getting full Social Security benefits and they rely on 401(k) plans more than any other group.
“They are worried that their savings will not be adequate for retirement, but they don’t have a plan for growing those savings,” the study assesses. “This group plans to live in the present and externalize big decisions — for example, wanting government to solve the country’s financial problems.”
The positive trait this grouping exhibits is that they are open to working with a financial planner and either already do so or plan to. “They recognise the need to invest smarter, but have not yet made the commitment to do so,” the study says.
Whereas the ‘overwhelmed’ have given up on trying to develop a financial strategy, this group just never seems to get around to it.
“They are the lowest users of financial advisers,” Libbe says. “We think about the ‘distracteds’ as people who make a lot, but they are just putting money away wherever and however [strikes them]. They really don’t have an overarching strategy, because they are too distracted with day-to-day things to get around to getting their financial house in order.”
The 2004 Merrill Lynch study delved into what it called “competitive investors,” those who “enjoy investing and try to beat the stock market.”
Even when knowledgeable and experienced, their sporting approach to risk set them up for failure. They can have a hard time letting go of losing investments and often put too much of their portfolio into one stock or investment.
“Not surprisingly, competitive investors also tend to chase hot stocks,” the study says, adding that they “are most likely to be overconfident and greedy.”
“All that enthusiasm for investing can be a detriment if left unchecked,” it says.
In a worst-case scenario, investing becomes akin to gambling, filled with risky day trades, penny stocks and other adrenaline-pumping pursuits of maximum profits.
Libbe says that risk tolerance can often fall along gender lines.
“When we separated out the men from the women, as a generalization, the women tended to be the ones who were conservative while their husbands liked to watch TV or talk to their neighbours about what stocks they were buying and what strategies they were employing,” she says. “During volatile markets, these women were saying, ‘OK, he’s had his fun, we’re not doing that anymore.’ They went from an extreme where a spouse was being a little more aggressive in the markets in order to achieve some growth and then, as they got closer to retirement or they saw their portfolios go down, they were were just moving totally towards cash. Of course, neither extreme is the right answer.”
A study last February by the MetLife’s(MET) Mature Market Institute and the Scripps Gerontology centre at Miami University looked at how various characteristics affect retirement decision-making.
Among those archetypes were what it called “wood knockers,” those who “think about the unexpected but rely on hope.”
“They choose optimism and sound something like this: ‘Today we don’t have any such plans, knock on wood,'” the study says. “They allow themselves to think about possible unexpected scenarios, but they are good at turning these around, creating hope-filled scenarios that don’t require planning: ‘I’d like to think things will stay peaceful, calm and sane for a few years … that we will have no crisis health-wise, that the economy will get better so things will seem more secure for everyone.'”
It refers to this as living in a “fantasy land” that can preclude necessary planning for an unknown future.
Hubris has brought many high-flying dreams crashing to the ground. When it comes to financial planning, overconfidence can be disastrous.
MetLife’s study cautions against being a “Plan B-er,” those who “regard themselves as fully awake to future risks but hold on to a contingency plan, or the idea of one, as a protection against trouble ahead.”
“They are realistic about the possibility of an unexpected scenario, but they are prone to inflated ideas about their capacity to handle them,” it says. “When their resources are not enough, Plan B-ers expect to cope, to adapt, to ‘pull back,’ to be ‘OK.’ In these cases, ‘plans’ are not necessarily carefully calculated strategies; instead they are often vaguely characterised adaptive scenarios. ‘We’re flexible. We’ll go with the flow. We’re willing to downsize if we need to.'”
These fall-back plans could ultimately be characterised as life-changing desperation scenarios: “I’d have to liquidate my house; I would have to go back into the workforce, if they’d have me.”
Libbe says finance-related characteristics can be a blend of nature and nurture. In many cases, people mimic the approach and outlook of parents or other influential people in their lives.
These personalities are not written in stone, however. People can always change and learn from their mistakes.