Your financial planner needs to be a good therapist, too.
That’s because your personality traits play a large role in the investment decisions you make. In fact, a failure to take your personality into account can have outsize consequences for your retirement standard of wealth, according to a new study that the National Bureau of Economic Research recently began circulating.
Consider the personality trait that psychologists refer to as “neuroticism.” The authors of the study found that those of us who score high in this category tend to have significantly lower equity exposures, on average. On the assumption that equities will continue to provide the best long-term return of any major asset class, this means an investor with untreated neuroticism will at retirement have a significantly smaller portfolio than other investors with different personality traits.
The study, titled “Personality Differences and Investment Decision-Making,” was written by Zhengyang Jiang of Northwestern University, Cameron Peng of the London School of Economics, and Hongjun Yan of Depaul University. They based their research on a survey of thousands of members of the American Association of Individual Investors (AAII). In addition to asking the more traditional questions you’d expect in an investor survey—on topics such as asset allocation, investment strategy, demographic variables, and so forth—the survey also was designed to determine where investors stand along five different personality dimensions.
The personality traits that these dimensions measure, known as “The Big Five” among psychologists, are, in the words of this study’s authors:
Openness to experience: “The tendency to be open to new aesthetic, cultural or intellectual experiences.”
Conscientiousness: “The tendency to be organized, responsible, and hardworking.”
Extroversion: “An orientation of one’s interests and energies toward the outer world of people and things rather than the inner world of subjective experiences.”
Agreeableness: “The tendency to act in a cooperative unselfish manner.”
Neuroticism: “A chronic level of emotional instability and proneness to psychological distress.”
The strongest correlations the professors found between these traits, on the one hand, and investment behavior, on the other, had to do with “neuroticism” and “openness.” Investors scoring high in neuroticism “are more pessimistic about average future stock returns and assign a greater probability to a crash. They are also more pessimistic about future economic growth and expect higher inflation,” the researchers write. In contrast, investors scoring high in openness “are more willing to take risks.” Not surprisingly, investors in the former category had average equity exposures that were significantly below average, while those in the latter had higher-than-average exposure levels.
Note that the surveys the professors analyzed were all completed at the same time, so all the respondents—neurotic or not, open or not—provided their answers against the same economic and investment backdrop. That meant the systematic differences that emerged between their equity exposure levels were caused by personality traits.
Overcoming the investment impact of your personality
Working with a financial planner who’s also a good therapist is not the only way to immunize your portfolio from being inappropriately influenced by your personality traits. Another way is to follow investment advice that is not tailored to your individual idiosyncrasies but generic advice that is appropriate for all investors of similar age and demographic characteristics. A target-date fund would be one example of such generic strategy.
There is much irony in this suggestion. The movement in the retirement planning industry over the last number of years has been toward increasing “personalization.” Just this week, for example, I received an email from the sponsor of my 401(k) with the headline “It’s time to get personal about your retirement.” And it’s hard to argue with an approach that is designed for you or me in particular.
But this new study suggests that this might not always be the right course of action. Insofar as personalization caters to our personality traits, it might be something to avoid.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.