From the Random Talk blog - third part of the Money trilogy
Summary: Why is personality important to your investment style? The four personality type-investment style combinations - Stable Cautionary, Mainstream Conventionalist, Commanding Enthusiast, Eccentric Visionary; what does your social media activity say about your personality and investment style? Stocks or Bonds? Value, growth or special situation investments? Bonus: What's your favourite Cluedo character!
This blog post is the third and final part of a 3-part money trilogy:
Part 1 - Themes: How to build an investment portfolio based on major themes of the moment to make it "trendy" (pun intended)
Part 2 - Rules: Some basic tenets to test your investment ideas and make them work
Part 3 - Styles: Selecting an investment style consistent with your personality
The winter has set in, the weather's been gloomy and sombre here in London, and the day passes generally in various shades of grey. To tickle your imagination and brighten up the day a bit, here it is - the third and final instalment of my trilogy on money - Themes, Rules & Styles. Just in case, you accidentally reached this page looking to reconcile your exotic sexual fetishes with your personality, sorry, you have come to the wrong trilogy. The one you're looking for is called "Fifty Shades of Grey" (I haven't read it but I am guessing it must be set in London or at least the author is British - who else could imagine that grey has so many shades!). The reference to "shades of grey" in the blog title is only because I was told by a friend that this would improve its placement in Google search results. I am also told any reference to it will attract more women to read my blog thus achieving a better balanced male-female readership ratio.
Why is personality important to your investment style?
The focus of this, the third part of the money trilogy, is to put forward a few different investment styles and help you to identify which one is suitable for you. Now, those of you who have ever sat down with a financial adviser or planner would have no doubt at some stage been presented with an "attitude to risk" questionnaire. After you have duly completed the questionnaire, the adviser would claim to have ascertained your risk profile and then proceed to recommend you a few investment choices suitable for your risk profile. While different individuals obviously have different risk appetite, I am unconvinced that most individuals are correctly able to elucidate their attitude to risk using a simplistic questionnaire. Furthermore, even if the approach to risk is correctly identified, two different individuals may perceive the same investment as having different levels of risk. Take gold for example - for some, it is the quintessential store of value, whilst for others it is a volatile commodity whose price fluctuates wildly in response to speculative financial market activity. Another common tool used by financial planners is based on life stage, which generally involves determining a target retirement date and then developing a plan to build a substantial pot to service you post retirement - the upshot of this is generally that you need to start saving more and earlier. Various planners have developed standardised portfolios for various stages of life - the overriding implication being that "all" individuals in the same age bracket should have the same approach to investing. NO!!! Human beings are different, the way we think of risk is different, our approach to life is different, and therefore how we invest our money ought to be one consistent with all other aspects of our life.
So, if the conventional methods of investment selection are not appropriate, that begs the question - "what is the right approach?" Before answering the question, I'll answer another simplistic, yet fundamental, question - "what is the purpose of investing?" I'll propose a universal answer to this question - a good investment style must achieve two objectives - the secondary purpose being to protect and expand our wealth, and the primary purpose to make us happy. This explanation, I believe, is fundamental in developing investment styles suitable for different individuals. Managing our financial affairs is, after all, an integral component of our life much like work and family. The secret to happy life is in making sure our vital life choices are consistent with our personality. Working in a job or having a life partner not consistent with your approach to life is likely to leave you dissatisfied and at loggerheads with life. Same goes for financial affairs - building your wealth will only make you happy if you do so in a manner consistent with your personality. So, next time a financial adviser gives you a risk questionnaire, ask them for a personality test instead- just the look on their face will make asking the question totally worth it!
The different shades, hues and colours of personality
It is well-understood that human personalities come in various shades and colours (let's not limit ourselves to grey). There are a number of different theories that abound regarding personality types. The various theories, while differing in construct, agree on the principle that human beings can be grouped together into a few personality types. It, therefore, seems natural to suggest that each personality type would also have a corresponding investment style. Given the multitude of investment techniques out there, it is in fact surprising that a personality based approach to investing isn't one that is commonly used (at least, not to my knowledge). A framework such as this involves making an honest assessment regarding your personality, and then selecting an investment style that is consistent with your personality. This, as I argued above, would ensure that your investments not only build your wealth, but, more importantly, also make you happy.
As I have promised in each part of this money trilogy, I will make what I say actionable. So, here goes, a framework for mapping your personality and investment style. If you read my blog, you know that I am a fairly observational sort of guy. So, I won't ask you to answer various arcane questions to ascertain your personality type. Instead, the framework I provide here is based on determining your personality type by observing your everyday behaviour and actions - analysing your personality really ought to be that simple - we should be able to do it ourselves. Specifically, I base my segmentation on the following basic characteristics - 1) Lifestyle 2) Friends circle 3) Work/ professional 4) Holiday/ hotel selection process 5) Social media activity 6) Information/ news/ world view. Based on these readily observable behavioural patterns, I develop four different personality types and a corresponding investment style that is consistent with each. There should be an element of natural selection here - so in all likelihood, the way you are managing your investments will already be a reflection of your personality. In case you identify a mismatch, take that as a call to action to review how you are managing your financial affairs.
To make things a bit more interesting, as a bonus, I have also mapped each personality type to a character from the classic murder mystery board game - Cluedo! If, like me, your childhood involved playing multiple rounds of Cluedo, you undoubtedly have a favourite character that you always chose to be. Hey, that was an important part of the game! If you think about the character you chose, and the character chosen by those who you remember playing the game with, you'll broadly connect the choice of character to their personalities. For example, I played the game a lot with my gang of cousins - and sure enough, we had one for whom the most vital part of the game was getting to be the talkative Miss Scarlet; luckily, we also had Reverend Green who ensured we played the game in a generally orderly manner. I had a favourite character too, but I ain't telling you that - if this framework works, you should be able to guess who I am! Just as a bit of background for those who haven't played Cluedo, the game involves six characters (each representing a player), all of whom are murder suspects - the players move round the board to various rooms, and through a process of guessing and elimination have to identify the murderer, crime scene and murder weapon. I have assigned one Cluedo character each to two of the personality types, and two Cluedo characters each to the other two - this is also representative of the number of people belonging to each personality type i.e. I consider personality types to which I have associated two Cluedo characters to be more common.
It is always important to be aware of the caveats when investing your money. Therefore, for each personality and investment style I have also included a red herring - these are the traps you would do well to be aware of and avoid falling into.
#1 Stable Cautionary
Your Cluedo Character: Mrs. White
The colour white denotes peace, quiet and simplicity. Mrs. White is depicted as a traditional, unassuming, middle-aged character with a plain jane appearance and perhaps a reserved demeanour.
Personality profile: Cautious by nature, you believe in leading a simple and stable life, and live well within your means. You value certainty and are likely to be perturbed by any unexpected changes. You interact primarily with your close family members and perhaps a few close friends you are likely to have known since childhood. These are the only people you trust, and rely on them for advice on where to go for holiday and restaurants, and are likely to visit the same place over and over again. You are generally suspicious of the motives of anyone you don't know well. You have chosen not be on Facebook and any other social media platforms - you are not interested in what's happening with other people's lives and are generally paranoid about who might get access to your personal information there. In personal life, you probably married the first person you dated and are now well-settled with kids. You believe jobs are for life and are likely to stick to your first job. Similarly, your political and social views remain stable and uninfluenced by popular fads. Safe, pragmatic and reliable.
Investment Style: Your financial plan for life is to earn money through secure employment, so the role of your investments is simply to keep your earnings safe. Your simple lifestyle allows you to save a relatively higher percentage of your earnings, so you can make do with a lower return. You are averse to borrowing, so you will postpone buying a house until such time that you have saved enough money to buy one with limited or no leverage. The vast majority of your savings ought to be in bank deposits and other fixed return investments. In order to improve your returns, you could look at longer term time deposits that would offer a higher interest than your savings account. It is best for you to avoid equities and other investments with volatile market prices, as any fluctuations are likely to cause you worry.
Red herrings: Do not get lulled into a false sense of security, which is a trap that could prove the undoing of people in your category. Bank deposits, as we have seen during the crisis, are not risk free, as banks can fail. So don't just chase the highest interest rate - for example, many UK depositors suffered from having their cash with lesser known Icelandic-banks that did offer a moderately higher interest rate, but then didn't survive the crisis. Know the level of government guarantee that applies to your deposits, and try to spread your savings across a few banks.
#2 Mainstream Conventionalist
Your Cluedo Character: Reverend Green/ Mrs. Peacock
Blue and green are basic colours that blend into the scene and setting. Reverend Green and Mrs. Peacock are depicted as the prim and proper characters, suitably attired with a dignified appearance designed to be presentable without being overarching.
Personality profile: You are a person who likes to follow accepted societal conventions and keeps up as society evolves. Consciously or unconsciously, like most people in the world, you are concerned about your social status and are constantly vying to "keep up with the Joneses". You want to make sure you belong wherever you are. Your social circle comprises people you would normally be expected to socialise with - people you went to school or college with, colleagues from work and perhaps your neighbours. You signed up to Facebook and LinkedIn so as not be left out - you keep a close watch on your news feed to ensure you know what everyone else is up to, and make sure to like and comment on something if a hundred others have, but would rarely want to be the only person to do so. Your choice of holidays and restaurants is based on what is popular in your group or those around you. If looking online, you would get on to a popular website such as tripadvisor or lonelyplanet and go straight to the reviews - you go by the popular mass opinion. Same is true with your political and social views - they are derived from and reflect what is popular on the mainstream channels at the time. In your professional life, you are ambitious yet patient - you obtained a degree from a reputed university and want to steadily climb up the career leader. Moderate, balanced and progressive.
Investment style: You have a steady and growing income stream from your profession, you do not overspend, so are able to continually add to your savings pot. As you want to achieve a lifestyle similar to everyone else throughout your life, you need an investment return in line with the overall market - you are happy so long as you are doing equally well (or equally badly!) as everyone else. Hence, your investment style needs to be designed to replicate the overall market portfolio (or achieving the market beta as the financial advisers might say). If you're in this bracket, one of the "stage of life" tracking styles would actually work for you. So, you always have a few months of your income in your bank account to provide liquidity. The remainder goes into a portfolio of mainstream equities and bonds, weighted towards equities in your younger years, and then gradually rebalancing to bonds as you approach retirement. As you are trying to replicate a market return, and are less concerned about exercising your own opinions, investing through mutual funds and unit trusts is an efficient mechanism. You are also likely to be wary of costs, so consider ETFs (Exchange Traded Funds) that track the market index passively with lower expense ratios than actively managed funds. In terms of stock categories, select blue chip value stocks with well-established cashflow streams. Dividend generating investments such as property REITS are also likely to appeal to you. Of course, you are eager to get on to the property ladder, so you would typically buy a house once you have been working for a few years with a mortgage at moderate leverage. As you have kids and your friends move into bigger houses, you are also likely to want to upgrade once or twice in life - so keep that in mind for your financial plan.
Red herrings: You like to follow trends, which is good, just be careful not to be the last one on the boat i.e. don't buy into equities when the rest of your friends start talking about how much money they have made last year. Your forte is that you are good at staying close to the pulse, so make sure you are aware and invest when the others are getting in, not when they are about to get out!
#3 Commanding Enthusiast
Your Cluedo Character: Colonel Mustard/ Miss Scarlet
Red and yellow are bright colours that stand out. Col. Mustard and Miss Scarlet are portrayed as the flashy and flamboyant characters in the game - the brash military man and the attractive social butterfly. They have a presence and persona not to be missed.
Personality profile: Confident and gregarious, you are a true busy body who leads an active life. At social gatherings, you are the person that everyone knows. You like attention and have an unending desire to stand out. You want to be the trend-setter, but only if it keeps you popular. While you may like to be the Joneses that everyone else is trying to keep up with, in reality you are doing your best to also keep up with everyone else. For this reason, you may end up overspending. You are constantly seeking out new communication channels - Facebook, Twitter, Whatsapp - you are always on! In fact, your active social life has readily extended itself to online social media where you actively partake in conversations and often initiate new ones - you want people to know what you are doing and join in. Your extensive and diverse network means you are able to cross-feed ideas, and would often introduce your group to new holiday destinations and restaurants. You are also the one who would know about this new travel website. In your personal life, you had many relationships and flings before eventually settling down with your current partner, who may or may not be the last one! Same goes for your work life - you change jobs as soon as a new more promising opportunity comes along. You have an opinion on everything and actively voice it - you are aware of all the world events that are in the news, but unlike the mainstream conventionalists, you will at times question the popularly accepted view, and then quickly change sides if it becomes too controversial. Energetic, dynamic and resourceful.
Investment style: Your desire to progress and outperform means you have taken a few risks and perhaps chosen a career with a more volatile income stream, and therefore you are more comfortable with the idea of a more volatile investment return. Unlike mainstream conventionalists, you are unlikely to be happy with just tracking the market - you want to be the leader and outperform the market, or at least have the hope of doing so. Hence, your investment style must be geared towards generating an above market return (or, as the financial advisers would say, you want to invest in alpha strategies).Thus, you could consider a portfolio with a higher weighting towards stocks, which over the long term should deliver a higher return (in return for higher intermittent volatility). You can further improve the risk-return profile of your portfolio by also including international stocks and small proportion of alternative investments such as commodities, currency, private equity. Of course, investing is more than just that for you - you also derive pleasure by talking about this great stock you have picked at the next party you go to. You like to be in control - so manage your own stock portfolio - mutual funds and unit trusts are not for you. Growth stocks with strong potential are more likely to appeal to you. Your desire to have a bigger house means that you have probably employed higher leverage, which will serve you well in a rising property market. If things go your way, instead of paying down the entire mortgage, you may consider maintaining some leverage to enhance the return of your investment portfolio.
Red herrings: Do not overstretch yourselves, while leverage per se isn't bad, try and have a backup plan and bring down your leverage to more manageable levels in the good times - that will serve you well on the rainy day. Also, make sure to diversify your portfolio as much as you can - you have the energy levels to manage a diverse portfolio - use that energy!
#4 Eccentric Visionary
Your Cluedo Character: Professor Plum
Purple is a non-standard, unusual and off-beat colour. Professor Plum is depicted as the unconventional character - intellectual, whimsical and perhaps slightly pompous.
Personality profile: Independent and unrestrained, you set your own agenda in life. You are deeply intellectual and always thinking a few steps ahead, and may appear to operate on a plane quite different to others. You constantly seek out people - but unlike the commanding enthusiast, you are less concerned about enjoying their present company, being rather more pre-occupied with the future relationship potential. Thus, your friend's circle comprises an eclectic mix of people and you often can't explain how you got to know your friends - you just met them somewhere or through someone and then hit it off. You research things extensively and make up your own mind on most things. When you are making a holiday plan you will analyse various options in detail and once you find something that appeals, you will go ahead with it no matter how many people on tripadvisor have trashed it - they must not have been your type! You partake in conversations, whether in person or on social media, when you have something interesting to say or something appeals to your fancy. When expressing your views, you are hardly ever concerned about the popular acceptability of your opinion - you thrive on providing an alternative viewpoint. In personal life, not the sort who had multiple casual flings, but a few deep and meaningful relationships. You seek out careers that satisfy your intellectual curiosity and when it ceases to be, you happily move on to something completely different. Intellectual, free-spirited and adventurous.
Investment style: As you are jumping from one career to another, you have a highly variable income stream and savings pattern. Conventional investment plans that require investing on a regular schedule are hardly suitable for you. What works in your favour is that you are likely to have an investment horizon much longer than others - in fact you are attracted by and like to analyse the long term potential of any investment opportunity. So, your investment portfolio comprises a mix of a few exotic investments - property development, venture finance, and special projects of various kinds. Stock types suitable for your portfolio are the ones where you identify a special situation such as a corporate restructuring or technological breakthrough. As your core investment strategy is designed to provide primarily long term capital appreciation, you would do well to set aside a portion of your portfolio in liquid and income-generating assets. These provide you the safety cushion as you pursue your other more "interesting" projects. Your decision to buy a house is generally impacted by all the other uncertainties in your life, but when you do, it may be advisable to keep leverage low so as not to compromise upon your flexibility.
Red herrings: You are quick to get excited by the long term potential of things, but do not get carried away by your ideas. Always take a reality check, and cut your losses if you find things are not going well. Combining your foresight with a practicality check will stand you in good stead.
So, what colour is your money?
Hopefully, you have found my exposition on basing your investment decisions on your personality interesting. That is how investing ought to be - interesting! Yes, managing your money and financial affairs is a serious matter, but money alone doesn't make you happy. As I said, your investment style should not only protect or expand your wealth, it should also make you happy. In the framework that I have provided, there are four personality and investment style combinations - 1) Stable Cautionary 2) Mainstream Conventionalist 3) Commanding Enthusiast 4) Eccentric Visionary. One is not better than the other. It is about finding the one you fit into. When your investment style is in sync with your personality, you'll have fun managing your finances. So, was there a colour that you identified with? And if you had a favourite Cluedo character, did it fit with your personality description? I would love to know which Cluedo character you identify with, so do drop me an email, tweet or comment. If you're doing so and have been reading my blog regularly, please do also tell me your guess as to which Cluedo character you think I am!
With that I conclude the third and final part of the money trilogy. In the first part, I demonstrated that you didn't have to be an expert to invest successfully. In the second part, I argued that you didn't need to be exceptionally smart or intelligent either. Hopefully, in this third part I have been able to show that investing is for YOU! It's been a long road researching and writing these 12,500 words on the subject of money. I had fun writing, hope it has been worth your while reading. The Random Talk blog will now move on to some other random things in life. Thank you for your ongoing support and interest in my blog.
Money Money Money - It's a rich man's world
Money Money Money - Themes, Rules & Styles