What kind of investor am I? | Absolute Beginners

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What kind of investor am I?

What kind of investor am I? Previously we asked, “What kind of investor are you?” You may think you know the answer to that question but you could be surprised by how different your real feelings are. So, in the interests of scientific exploration I volunteered to take Barclays Wealth’s psychometric profile to find out just what kind of investor I really am.

Using robust statistical techniques and large-scale field testing, a dedicated team of behavioural finance experts has, says Barclays Wealth, determined the multiple dimensions that most precisely express an individual’s financial personality.

These describe how you are likely to perceive, interpret and react to financial events. In combination, these dimensions form a high-resolution picture of who you are. Using that data the theory is that the wealth manager can create the optimal, bespoke wealth management solution for you.

Greg Davies, Head of Behavioural Analytics, Barclays Wealth, told me, “The idea essentially is that classical finance is fine in so far as it goes… but it’s not the whole picture and, crucially, it misses the fact that we are not robots when we invest. We’re not all completely rational individuals all the time. Indeed, most of us are quite irrational quite a lot of the time.

“That irrationality means that the solutions of traditional finance are far too narrow. First, it fails to recognise what is different about different individuals beyond simply saying you should have a higher risk or lower risk portfolio; and, second, it fails to consider that giving people a great product or a great portfolio is really only half of the solution. Unless I simultaneously help to make you emotionally comfortable with the journey to help you stick with that portfolio through the ups and downs and to make rational rebalancing decisions rather than emotionally-driven knee-jerk reactions then, arguably, I haven’t done you any good at all.”

With a scientifically designed questionnaire exclusive to Barclays Wealth, the wealth manager aims to provide a richer and more personalised assessment of your financial preferences than traditional methods. Complementing the experience and judgement of the more traditional private banker, the questionnaire provides insights into the multiple dimensions of your financial personality. At least that’s what they say.

The Science of Me

This assessment, I was told, should give me a greater understanding of my investment decisions, why I make them, and how I am likely to react to the uncertainty inherent in investing. It should also highlight some of the ingrained patterns of thinking – such as short-term emotional judgements – that can lead to poor decision-making, helping me avoid them in the future. Of course, this analysis will not mean that I can eliminate risk entirely but it should mean that I am comfortable with the level of risk I am taking – always remembering that the value of my investments can fall as well as rise!

So I took the test and the results were analyzed for me by Greg Davies. With an eclectic background in academia, economics, philosophy and psychology, as well as financial services, he has, since 2006, been developing and implementing commercial applications drawing on behavioural finance, the psychology of judgment and decision making and decision sciences. He is also an expert on profiling individuals' financial personalities, risk attitudes, and investment needs, and connected these to tailored individual portfolio design.

The results of the psychometric test break down into six measures: risk tolerance; composure; market engagement; perceived financial expertise; delegation; and belief in skill. The first three are all about attitude to risk and the latter three about your financial decision-making style.

Risk Tolerance

Individuals with high risk tolerance are more likely to accept the possibility of losing some of their wealth so that they can access the types of investments which might also achieve very high returns. The level of my risk tolerance score indicates which goal it would be rational for me to pursue for the long-run optimisation of my portfolio.

My risk tolerance is ‘medium-high’ which means I am prepared to accept regular fluctuations in the value of my portfolio and that I am willing to take on higher risk than other people in exchange for the opportunity to increase my wealth in the long run. It also means I am aware that to achieve higher returns I will need to put a significant part of my portfolio in market investments. This means that my investments could be subject to significant short-term fluctuations in value and that the potential for long-term gain and loss are both greater.

"It is true that when markets are rising everyone shifts to focussing more on relative performance and when markets are going down, everyone starts to think 'matress' as a safe haven for their money." - Greg Davies

Greg Davies said, “This is more or less where traditional finance and the traditional methodology of other banks stop. A number of firms around the world claim to be using behavioural finance but largely it’s just lip-service."

Composure

Risk tolerance is an indication of rational willingness to trade off an increased chance of loss for better possible returns in the long term. Composure, on the other hand, indicates how I feel about these short-term fluctuations.

My level of composure is ‘medium-low’. This means I am more sensitive to uncertainty than many people even when there is little I can do to influence future outcomes. While this is a useful trait in helping to plan, prepare and react more quickly to negative outcomes, it can cause problems in the way I perceive investment performance.

What’s the answer? I need to manage my own expectations and remember that investing is a long-term activity and that there will, necessarily, be downs as well as ups. The danger is simple – that I over-monitor the performance of my portfolio and focus unduly on short-term fluctuations which are irrelevant for their investment performance in the longer run. This does make me sound like a bit of a worrier doesn’t it?

Commenting on this odd combination of high-ish risk tolerance and low-ish composure, Greg Davies said, “This is actually a pattern that surprised us when we first picked up on this… it turns out to be quite a common pattern among successful entrepreneurs and in fact, possibly, unsuccessful entrepreneurs although we don’t see many of those. We see it in very successful business people who are risk takers but are very short-term focussed and engaged with their decisions. Coupled with high perceived expertise, exposure becomes vigilance.”

Market Engagement

With a ‘medium-high’ score here I am a willing participant in the markets as long as the risk/return features of an investment are appropriate. I know that I am putting my wealth at risk by investing but I have no problems in doing so as long as the risk I take is appropriate to my level of risk tolerance. I understand the benefits of accepting market fluctuations in exchange for the opportunity to increase my wealth in the long term and I am sufficiently comfortable with financial investing to engage the markets without worrying that I might be taking on unseen risks beyond my risk tolerance level.

Perceived Financial Expertise

It was no surprise to me that my level of perceived financial expertise was ‘medium-high’. I feel, Greg Davies told me, fairly familiar with financial markets and investments and was likely either to have already engaged with or experienced a range of market investment instruments, or have some knowledge about investments.

As my perceived financial expertise is what it is, my risk tolerance should have settled to a stable level, putting me in a better position to make informed decisions about the level of risk I am prepared to take on.

Delegation

I showed only a ‘moderate’ desire to delegate responsibility for my financial affairs to someone else. What this means is I need to strike the right balance between relying on the skills of a competent investment manager and retaining some control over the decision-making process for my portfolio. In other words, I am prepared to take advice but I am wary of letting someone else have complete control over my investments – or maybe there’s more to this.

Greg Davies said, “A middle score here as a sophisticated investor – this is the sort of discussion a banker would have with a client – could mean that you want to be kept informed but you want some of the month-to-month stuff done for you or it could mean that you are prepared to delegate certain aspects of your portfolio but not others. We would need to dig deeper to understand that – that’s why this process will never replace the personal banker relationship.”

Belief in Skill

This isn’t a matter of belief in my own skill. It is about how much value I put on investment skill. I show a ‘moderate’ belief in the value of investment skill. Skilled investors can beat the market on average but such skill can be hard to identify and it would seem that I feel investment managers and their sophisticated techniques may not be worth paying for in every case. However, I don’t want my investments simply to track the performance of market indices so I am open to alternative investment approaches with proven track records.

"The hardest thing I have had to do is persuade people to cut equity exposure3 when markets are really high!" - Khurram Jafree

Greg Davies added, “Somebody who’s very low down here is a stereotypical ‘efficient markets’ believer. He will never buy anything other than an index fund. Someone who is at the top might believe that 18 per cent a year returns are possible every year if only he could find the next Warren Buffet to do it or perhaps believes himself to be the next Warren Buffet!”

My Financial Personality

Put all these measures together and what do they mean? My generally high scores for risk tolerance, market engagement and financial expertise are unusual in combination with the anxiety that uncertainty causes me. It would seem I know too much! Or, as Greg Davies put it, it is possible that my perceived level of financial expertise means I feel I should accept a high level of risk in order to reach my investment objectives.

Higher-risk investments leave me susceptible to the kind of frequent changes in the value of my portfolio that might make me emotionally uncomfortable – a possibility amplified by my willingness to invest in financial markets. However, while I might be uncomfortable at least I know what I am doing. My relatively high perception of my financial expertise means I should be able to articulate my attitudes to risk more clearly, allowing me to clarify the reasons why want to or feel that I should be taking risks that make me twitchy!

Of course, our perceptions do tend to change over time, partly because we mature (we hope) but also because we respond to what’s happening around us. Greg Davies said, “It is true that when markets are rising everyone shifts to focussing more on relative performance and when markets are going down, everyone starts to think ‘mattress’ as a safe haven for their money.” Khurram Jafree, Director, Investment & Product Office, Barclays Wealth, added, “The hardest thing I have had to do is persuade people to cut equity exposure when markets are really high!” When markets high, let me remind you, is the right time to sell!

The Next Steps

Having exposed my financial personality, what are the next steps? Khurram Jafree said, “From a portfolio construction perspective, the richness of data that comes out of this financial personality profile together with the other information we have about your assets, really translates into a far more bespoke portfolio. These six dimensions describe not just risk but how you invest… We can drill down very specifically in terms of percentages what you would hold and how you would hold it.”

Barclays Wealth marries the results of the financial personality profile with my investment objectives to create a tailored portfolio. There is a cash allocation for short-term needs, future outgoings and a safety cushion; an optimised portfolio (the central part of my asset base) which is designed to reflect my longer-term investment strategy; and a guided portfolio of other investments selected on a case-by-case basis to deliver additional returns, including tactical investment opportunities and assets in classes such as private equity and real estate where liquidity is scarce.

The Optimised Portfolio

The results of your financial personality assessment will be the key to what is the appropriate portfolio for you. For most investors it will be a mix of market return investments and absolute return strategies. The exact balance of that mix will be decided by your financial personality. While some investors will have a strong preference for either market return or absolute return strategies, a blend of both is often more appropriate. Market return investments offer exposure to quoted stocks and shares through a variety of funds both actively managed by fund managers and index-linked passive vehicles, delivering index returns. Absolute returns suit those investors preferring a steady long-term approach that is less driven by the performance of the market. Absolute return investments can be grouped according to strategy, as opposed to the more traditional concept of asset class. The common aim is to deliver stable returns in excess of cash rates, but the specific skill or technique used may vary widely between strategies.

The Guided Portfolio

This is where you can have some ‘fun’ with your investments. It is where you can get most actively involved in the decision-making process: meeting leading asset managers from around the world, expressing your own views while learning about new investment types and techniques. Investment opportunities here should be chosen to complement your Optimised Portfolio, including as I have already mentioned, both long-term less liquid investments and short-term tactical opportunities. These investments can be idiosyncratic, and scientific modelling may be inappropriate – this will be more about your desires and your private banker’s experience.

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