What kind of personality best describes you as an investor? Financial coaching (2)

Our different personality traits and preferences, along with a wide range of behavior with emotional and cognitive biases, have a strong impact on the way that we invest. The following are the ten worst errors of beginner investors.

The idea that our money works for us is interesting, but beware. Here are the errors that we should avoid:

  1. Investing is not a gamble.
  2. Not researching. To investigate is the key. The investment we want to make as well as the product, the advisor, etc.
  3. Not having a horizon, and a goal within.
  4. Not balancing risk and expected results.
  5. Not considering our own risk aversion.
  6. Not diversifying.
  7. Not deceiving with low prices.
  8. Not taking into account the consequences of taxes in our investment.
  9. Ignoring management fees.
  10. Accepting the premise that markets are always efficient.There are four different types of personality describing the majority of investors.

According to the CFA Institute, there are four different types of personality describing the majority of investors: Conservative, Follower, Independent and Accumulator. Each one includes their own investment behavior and their own biases.

Behavioral Finance and Wealth Management: How to Build Optimal Portfolios That Account for Investor Biases (Wiley Finance) de [Pompian, Michael M.]

The same author of the article, Michael Pompian, in his book Behavioral finance and wealth management: how to build optimal portfolios that account for investor biases, describes biases in our behavior associated with each type of investor behavior. It is necessary to identify our clients in these four types of investor from a behavioral economics approach. We have to deploy a process to identify the pattern of our clients behavior that could lead them to, in a turbulent moment, modifying substantially -wrongly? – the rational definition of your long-term plan investment .

We need to identify our clients with the fourth investor types from a behavioral economics aproach

The process is:

  1. Interview with our client to identify passivity or activity traits. There are questionnaires to do this.
  2. To find out the client risk tolerance.
  3. To confirm behavioral biases related to the type of investor.

Five investor profiles looking to be advised.  Vanguard

Vanguard, one of the largest companies in the world in investment management, has identified five of investors behavior profiles when they are seeking advice. This is very interesting for expert advisors in individual investments and financial coaches since it complement the previous view of investor profiles. This is now the perspective that investors are actively looking looking for:

  1. Talk to me. Investors believe they need ahnd-holding – a financial guardian.
  2. Do it for me. Investors don´t spend much time on investments.
  3. I want it all. Investors demand credentials and performance but also have the strongest opinions about the personality must-have for an inversor.
  4. Show me performance.  Investors are confident and finnancially savvy.
  5. Partner with me. Investors are confident, self-made and organized.

The way we can work with each personality profile identified previously and adding his or her potential bias gives us a complete advice process.

Planning for savings ad investments taking in to account the psychological barriers, but also our personal goals, is smarter .

To complete the advisor vision in the help process of the client we incorporate the time factor in the goals setting. How can we help our clients to display, to define their savings and investment objectives over time?.

Shlomo Benartzi  introduce us, in his book Thinking Smarter, seven steps to your fulfilling retirement and life, to the necessity of using Behavioral Economics knowledge to identify our goals in order to start the process to be able to achieve them. He defines, from a scientific perspective, seven steps in his model:

  1. Identify your goals, something that is not obvious. We have to identify the value of what we want. We shouldn´t create alternatives we imagine are possible.
  2. Disover blind spots (Remember Dilip Soman?). The solution are de reference check lists.
  3. Prioritize your goals. A good alternative is to generate a list of priorities.
  4. Think beyond one future. It seems obvious, doesn´t it? Using prspecting is the way. We explainfuture events ourselves as if they had happened.
  5. Recognize the limits of forecasting.
  6. consider the perspectives of others. If we konw somebody close to us with this experience it will be easier. This is a easy way as learning from others..
  7. Reprioritize goals. Life cahnges and change us.

– A note from the author. When you start to write you just don´t know wher you are going to finish. In the following article we are going to incorpórate reflections about the value gained from financial coaching and the coming proposal from robot advisors.-