How understanding your investor personality can help you make better financial decisions – Part Three

In the third article of our behavioural finance series, we investigate the final three personality traits that may be impacting you and your financial decisions, with advice on how to overcome them.

As mentioned previously, these are all taken from Finura’s investIQ test, powered by Schroders, which we encourage all our clients to take when they join us.

IMPULSIVITY

Do you favour immediate rewards at the expense of your long-term goals?

If you’re affected by impulsivity, you tend to focus on the here and now rather than the future, and favour immediate awards rather than future ones. For example, given the choice between receiving £100 today or £120 in two weeks’ time, you would choose to have the money today. As a result, you can overvalue immediate rewards to the detriment of your long-term goals. In financial terms, this means you could find it difficult to change your short-term spending habits in order to save sufficiently for the future.

To manage impulsivity, try seeing yourself as two people; a short-term spender and a far-sighted planner. The first wants to spend now, regardless of the long-term impact, while the second wants sufficient income over a lifetime.

To help you reach your financial goals, think about what your far-sighted planner would do in order to manage your short-term spending. Force yourself to save – explore how financial arrangements can help, such as workplace pension schemes or automatically transferring a portion of your salary into a savings account.

PROJECTION

Do you think your situation will remain the same over time?

Projection bias is the tendency to believe that your current views, feelings and needs will stay the same over time although, statistically, this is highly unlikely, as your income needs are likely to change in the future.

For example, you may wish to buy a house, start a family or require extra cash in retirement. This highlights the importance of realistically assessing and considering your potential income requirements to ensure you can fulfil your future plans.

To overcome projection bias, first consider a variety of income scenarios for your future, then examine what investment steps you need to take today in order to meet these requirements.

Next, be conservative. Base investments and contributions today on a worst-case scenario so you have a better chance of meeting your future income needs more comfortably. Finally, keep emotion out of it – ensure you have a clear head when planning your income future and be realistic. Better still, consult a financial adviser, who can guide you through your options.

ANXIETY

Are you easily influenced by short-term uncertainty?

If you are prone to anxiety bias, you tend to be easily influenced by the short-term ups and downs of the market and feel compelled to take action. This may lead to irrational investment decisions that undermine your long-term financial objectives.

To overcome anxiety bias, stick to a plan. Keep records explaining why you made key financial decisions and refer back to them; this could help avoid panic selling which could result in short-term losses.

Limit how often you access short-term information, as this encourages a longer-term view of your investments and helps you avoid taking any impulsive and unnecessary action. Finally, take an approach based on facts rather than emotions. A financial adviser can address your concerns and guide you through your options.

To take the investIQ test, please click here.

Capital at risk; the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Past performance is not a guide to future performance and may not be repeated.

Source: http://www.schroders.com/en/uk/private-investor/a-guide-to-investing/investiq/