Have you ever considered that your personality traits could affect how you invest? Well, every investor has an investment plan to reach their investment objectives. Often, psychology plays a crucial role in how investors perceive investment performance.
For instance, if you are a regular investor, you’ve probably made investment mistakes. You may sell an earning stock early or hold on to a loss-making one too long. Mistakes are common, but some mistakes may haunt you, like when you disregarded your advisor’s advice or followed a friend’s advice.
Robert Durand, Professor of Finance, Curtin University in Australia, wrote a paper based on the leading five-factor model of personality traits (Big Five) in the Journal of Behavioral Finance. His research shows that investors’ personality traits affect their investment decisions and outcomes.
Behavioral Finance deals with external and internal elements that affect an investor’s investment decisions. We have five key personality traits that play a significant role in your investment decisions. Let’s take a look.
It is the tendency to focus on getting gratification from outside and others. Such investors are social, eager, chatty, and confident and won’t hesitate to make or reject changes to their investments. They tend to be impulsive, pleasant, and friendly when interacting with others, which lets them gather more information before making decisions. Extraverts take on more risks to fulfil their need for excitement. An advantage such investors can have is their high-risk tolerance, which means possible high returns. But, such tolerance can lead them to take on too much risk and lose money.
It is a trait that lets a person put others’ needs before their own. Such investors are polite, kind, tolerant, naïve, selfless and hopeful. They prefer helping others and working with those needing help. An advantage is such investors cooperate with their advisors on their investments.
However, such agreeableness can also mean they accept all forms of misinformation. It means such investors may take unsolicited advice at face value as they lack the expertise in evaluating investments, causing instability in their portfolios. Moreover, they do not like to offend others and may hesitate to raise red flags they see.
It is a personality trait that reflects a person’s tendency to follow the rules, be responsible, organized, and goal-oriented. Such investors tend to be reliable, dynamic, and good at self-control. As a result, they are more likely to avoid stress and earn high returns through their planned investments. Most long-term investors tend to be conscientious, cautious, and meticulous, with an ability to delay instant gratification for long-term returns. However, such investors are risk-averse too and prefer steady and stable investments.
It is a trait when people are emotionally unbalanced and tend to feel anxious, angry, and depressed. Such investors are sensitive to their external environment, and fluctuating markets tend to increase their anxiety and fear of investing. Like extraverts, these investors have a high-risk tolerance, which means potentially higher returns. However, their impulsiveness can lead to irrational decisions affecting their investments.
Open to experience
It is a trait that lets a person be open to various experiences and adventures. Such investors tend to be inventive, interested, and open to new ideas, actively seeking new experiences. But unfortunately, their tendency for fresh experiences could also lead to irrational decisions, adversely affecting investment performance.
Personality traits and their relation to investing
According to Prof. Durand, personality traits are stable after age 30. So, if you know your personality traits early and understand how they will affect your investment decisions, you can avoid making mistakes. Neuroticism and extraversion play a more prominent role than the other traits.
Investors scoring high in neuroticism are attracted to risk but are still uncomfortable. They could sell risky stocks and buy others as they have a tendency to make emotional decisions. On the other hand, extraverts manage their investments better, even if they have a high-risk tolerance.
Looking at the traits above and their effect on your investment behavior should help you avoid making such mistakes. Having fundamentally strong stocks in your portfolio for the long term can help you earn better returns and create sustainable wealth.
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