Behavioural finance study shows investors regret lack of discipline

The wealthier the investor, the more likely they are to opt for greater financial discipline, according to a study conducted among high net worth individuals globally.

The report, Risk and Rules:The Role of Control in Financial Decision Making, conducted for Barclays Wealth Insights, is based on a survey of 400 high net worth individuals in the UK and more than 2,000 across the globe.

It considers the different financial personality traits that exist amongst wealthy investors, and the different self-imposed rules and strategies they put in place to deal with these traits.

It shows that “emotional” trading can cost investors nearly 20% in returns over a ten-year period and those who employ high strategy usage have on average 12% more wealth than those who do not use rules. Globally, 41% of high-net worth individuals wish they had more self control, with the figure rising as high as 86% in Taiwan and 70% in Hong Kong.

Greg Davies, head of Behavioural Finance at Barclays Wealth said: “Many people will be surprised to see that wealthy individuals want greater financial discipline. However you have to remember that with increased wealth comes an increased complexity of investment decisions. The key thing investors need to consider is how these decisions might fit in with their overall investment strategy, and importantly, how they fit in with their individual requirements, both financial and emotional.”

In order to understand investment behaviour and the pitfalls investors may be prone to, the report considers three personality dimensions; risk tolerance, composure and promotion vs. prevention.

It reveals an interesting pitfall on the theme of “emotional trading”, which leads to buying high and selling low. Limitations of self-control lead to what the report identifies as the trading paradox.

A third of those polled (32%) say that trading frequently is necessary to get a high return, however these respondents are over three times more likely to believe that they trade too much. In total, almost half (46%) of respondents who believe you have to trade often to do well think that emotions force them to do this.

This can potentially lead to the investor becoming unable to control how often they trade. Of all the personality types, the most likely to fall into this category are those with low composure, high risk tolerance and a high prevention focus.

The use of rules and strategies in financial decision making are seen as hugely effective by wealthy respondents. They provide increased financial satisfaction, and are associated with higher wealth levels for those who report wanting more financial discipline. Comparing the group with the highest strategy usage to the lowest strategy usage, we see a 13% boost in financial satisfaction and a 12% boost in wealth.

The report also shows how a desire for greater financial discipline declines markedly with age amongst global respondents, from over half (53%) of those aged 45 and under wanting more control over their financial behaviour, to just a quarter (26%) of over 65s. This in turn results in less need for the use of strategies. This is also associated with a decrease in stress and an increase in financial satisfaction.

Younger respondents also show a habit of deliberately avoiding information about how the market or their portfolio is performing – 82% of those aged 45 and under do this, compared to just 68% of those aged 65 and above.

See the full report

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