What’s Your Investment Personality?

What’s Your Investment Personality?

All men should strive
to learn before they die
what they are running from, and to, and why.

~James Thurber

Have you found the investment process very frustrating? Maybe you’ve been trying to pick individual stocks, implement the recommendations of your advisor, or follow a passive strategy on your own. Any one of these investment strategies could work. Those who spend a lot of time debating which is the best one miss the more important question: Which one will work for you?

Regular readers know that I’m a fan of the movie The Princess Bride, so I can’t resist quoting one of my favourite exchanges. This one involves the characters Vizzini and Fezzik:

Vizzini: Finish him. Finish him – your way.

Fezzik: Oh, good. My way. Thank you Vezzini. Which way’s my way?

Figuring out which way is your way is a good first step to mastering the investing process.

Know Thyself

A couple of weeks ago I asked: Can a Personality Quiz Change Your Life? I suppose that depends on how well you already know yourself and grasp your underlying strengths and weaknesses. “Know thyself” was inscribed by the Ancient Greeks at Delphi, so the concept isn’t exactly revolutionary.

Still, it can be easy to underestimate the importance of self-discovery. A fundamental understanding of what makes us tick can have a real impact on our sense of well-being and success in every part of our lives. Asking someone to perform an action of which they are inherently incapable means setting them up for failure.

Likewise, telling a risk averse investor how to play the hottest penny stocks probably won’t help any more than advising someone with a much higher risk tolerance to set their asset allocation at 50% stocks and 50% bonds and forget about it. Investing is like any other activity in life: we need to figure out how to make it work for us.

7 Investment Questions

In a recent study, researchers asked people who had validated their MBTI personality type the following series of questions about investing and risk tolerance in an effort to see if there were any discernible patterns:

1. Which would you prefer for your investment portfolio:

a) To reduce risk and sacrifice return
b) To increase return taking more risk

2. How would you prefer to invest?

a) Through a mutual fund
b) In stocks directly
c) Through a financial advisor

3. Rank your interest in financial/investment issues:

(2 Cents: I’m assuming there was some type of 5-point scale from “Not Interested” to “Very Interested” involved here.)

4. How would you assess your appetite for financial risk?

Low, Medium, or High

5. What is your investment priority?

a) To provide security
b) To build wealth

6. What is your level of anxiety about making proper investment choices?

7. What does money mean to you? (Rank the following options.)

a) Security for old age
b) Power and ability to influence events
c) Ability to improve the quality of life of those I care about
d) Ability to support my own aspirations and growth

Personality type had more effect on answers to some of these questions than others. It had “the highest impact on risk tolerance, the financial planning process and level of interest in investment issues and less impact on actual choice of investments such as stocks and bonds.” For example, my type (INFJ) is not supposed to be interested in managing their own portfolios. That is clearly not the case for me, but INFJs are also supposed to be highly risk averse and that fits very well.

How Can You Use this Information?

Answering these questions is a good place to start if you’re interested in improving your investment performance and reducing your stress level. Once you’ve got a handle on your basic views surrounding money and investing, you can audit your current investments or set up an appropriate approach to use in the future.

Do your investments reflect your financial values? If you’re more interested in security than building globs of wealth, it makes sense to evaluate your investments on that basis. Are you taking too much risk? Maybe you’ve been trying to manage your own investments, but you’re finding it stressful, time-consuming and frustrating. Perhaps it’s time to consider getting some outside help. Not everyone finds investing interesting, and that’s OK.

On the other hand, maybe you’ve been with the same advisor for years and you’ve learned a lot more about investing since you signed on with him or her. If you’re wondering whether you could do better, you can have a frank discussion with your advisor and/or try your hand at investing some of your money yourself. Just make sure you don’t make any drastic moves all at once.

Finding the right approach is an exercise in trial and error. It takes time to learn about all of the options available to you and decide which ones might work. The key is to look at all of your options first and narrow them down to a few that seem to suit your personality best. Your investing methodology can (should?) be as unique as you are.

You’ll always be able to find people who claim that their way is best. They may be right, but their way may not work for you. Finding the investment approach that works for you is the first step to success – whatever success means to you.

Did your answers to the questionnaire clarify anything for you? Do you think your investment approach is congruent with your personality?

Written by Kim Petch

10 Responses to What’s Your Investment Personality?

  1. Jim Yih says:

    Thanks for another post that makes you think …

    One of the challenges of all of these questionnaires, especially the ones created by financial institutions is the answers can changed depending on how you feel in a given day. I understand why these questionairres exist but I think it can be dangerous to make long term investment decisions based on the answers to these questionairres.

    If you think about it, people tend to be more conservative when times are tough and they tend to accept risk more when markets are strong. If you think about it, this is counter productive to the theory that you should buy low and sell high.

    I wonder if these risk tolerance questionairres are really effective!

    • 2 Cents says:

      I agree with you on the questionnaires designed by financial institutions. This one looks a little like those, but to be clear, it was only designed to look for correlations between MBTI type and investment tendencies.

      Either way, most of us feel a lot less risk averse during a bull market and much more so during a bear market. As you point out, that’s probably not the best approach. Having said that, if we can be honest with ourselves (and our advisors) about our risk profile, I think we can design a better strategy and sleep better at night.

      Thanks for your comments Jim! :)

  2. Further to Jim’s point, the basic flaw in personality tests/risk tolerance questionnaires is in the measurement of innate vs. learned personality traits. Studies suggest that while under stress we tend to rely more on our innate qualities (not usually how we are feeling when we take the test). This can seemingly create a contradiction between the way we normally might act and how we react to stress. It is my experience that the important factor to understand is if/how/when we feel fear and greed, since that is the major difference between paper trading and the real thing. Of course, a good personality test should provide us with some insights into this area. A good system is one which helps us compensate for our own irrationality.

    • 2 Cents says:

      Excellent points Ian. One of the main challenges of psychological testing is that we are forced to rely on self-reporting a lot. I like your idea of finding a way to compensate for our own irrationality. I suspect, though, that each of us might be irrational in different ways, with someone like me leaning too far to the fear side while others innately tend to swing for the fences a bit too much.

      Does that mean it’s better for those who are highly risk averse to bite the bullet and step into a little more risk, or should we invest according to our comfort zone? Hmmm … Now you’ve really got me thinking …

  3. 2 Cents, personally, I believe investing is more about discipline rather than comfort zones. We need to find the discipline to buy when our brain screams sell, and sell when our brain is telling us to buy. Not all of the time, but according to a system that has been shown to work according to our own personal style. But then, my beliefs probably say something about my personality type…

    • 2 Cents says:

      Now I know why I get confused when I think about this stuff too much. ;)

      I do think that there’s more than one way to invest successfully, and that our choices should be informed by our innate tendencies. Maybe it’s about understanding our strengths and weaknesses, and exploiting the former while we work around the latter.

  4. my type (INFJ) is not supposed to be interested in managing their own portfolios. That is clearly not the case for me, but INFJs are also supposed to be highly risk averse and that fits very well.

    I think what you are trying to do here (examine how different investing strategies work differently for people with different personality characteristics) is valuable. One problem is that generalizations about personality characteristics can be misleading.

    I also am an INFJ. I can see why most INFJs would not care about managing their portfolios. INFJs tend to be dismissive of money issues. BUT — that can change. Once I came to see how managing my money effectively was a step in a process that led to me being able to do meaningful work, I became INTENSE about managing money. The same thing that makes a particular personality type not care about something in most circumstances can make it care a lot in different circumstances.

    This also applies with the risk averse question. I worry when my boys ski that they will get hurt. That’s the risk averse side coming out. But I left a high-paying corporate job to build an internet writing business in which I have made no income for 10 years. That’s not the sort of thing a totally risk-averse person would do.

    It’s the reason why the risk is being taken on that matters for INFJs. They are sensitive to how risk can lead to hurt and so they are more cautious as a rule. But they also can see potential good outcomes more clearly than others and will encourage risk-taking to achieve those outcomes.

    I just watched “Ghandi” the other night with my boys. It would not surprise me to learn that Ghandi was an INFJ. Did he avoid risk? He didn’t like violence. He could see clearly in his mind where it might lead. But he took some exceedingly risky political moves, moves that were viewed even by his followers as foolhardy at the time he took them.

    The part that I like about the article is that people really do need to consider their personality types when trying to figure out what sorts of risks are best for them. Some personality types cannot stand to be out of the mainstream – they are too social to be able to bear it. Some (INFJs) thrive on it. You need to know which sorts of risks are okay for your personality type to be able to develop an investing strategy that will work for you.

    Rob

    • 2 Cents says:

      Well said Rob. That’s pretty much what I was trying to get at. Your point about motivation being the key for INFJs is important too. I had a similar experience. When I was in University (majoring in English) I thought all business majors and folks who concentrated on money were shallow and greedy. I wonder what my 20-year-old self would say about what I do today? ;)

      I got into financial stuff as a way to gain more control over our life, which makes me worry less and feel more safe. I like having most or all of our money in GICs, but I have invested in speculative stocks in the past and I wouldn’t rule it out in the future. My husband and I have made career choices that others would consider very risky in the past too, so I’m not 100% risk averse either.

      For the record, Ghandi was an INFJ.

      Thanks for your insights.

  5. Finding your approach is definitely a HUGE part of the investment process. Good post!

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