You consider many things when managing your financial portfolio: Risk tolerance, fees, companies you’d like to support, how much you can afford to invest—and, of course, the events of 2020. It’s an understatement to say last year was turbulent and affected how we think about money.
But there’s another factor, a little closer to home, that can impact how you invest: Your personality. Don’t worry—we’re not going to make you do a two-hour questionnaire to figure out how your temperament can affect your investments. Instead, we look to observations from the 2021 TD Wealth Behavioural Finance Industry Report.
“Behavioural finance” is the study of how psychological factors influence the financial decisions we make. And the latest behavioural finance study from TD Wealth found that there are many psychological and behavioural factors that can impact a person’s willingness to take risks when it comes to their finances and investments. In other words, your personality and your relationship with risk can directly affect how you invest.
Identifying your investing personality
If your personality can influence your investing decisions, then how do you identify your personality? Using five main personality traits (known in psychology as the Big Five), TD Wealth can help you identify your personality based on how you rank on a scale for each of the Big Five traits: Conscientiousness, Agreeableness, Reactiveness, Extraversion and Openness.
With the help of a TD Wealth advisor, you can take the TD Wealth Personality assessment—an easy quiz that helps you identify your investing personality. Once you understand what’s affecting your investing decisions, you can use this knowledge to learn more about yourself and how your personality may impact the financial decisions you make.
Personality traits and investing
Here are the Big Five personality traits and how they might help you identify your investing personality through the TD Wealth Personality assessment.
Conscientiousness: Do you have a good sense of right and wrong? Does it matter to you?
- LOW: Low conscientiousness may be associated with short-term compromise and living in the moment
- HIGH: High conscientiousness may be characterized by short-term sacrifice in pursuit of long-term goals.
According to the report, someone who is highly conscientious tends to be low risk with their investments, while the opposite may be true for those with lower conscientiousness.
Agreeableness: How likely are you to go along for the ride?
- LOW: Low agreeableness may suggest a more inquisitive and questioning personality.
- HIGH: High agreeableness may suggest a more trusting and cooperative personality that values social harmony.
Those who are highly agreeable may be less likely to work in a volatile industry or have volatile income and may be less likely to have had poor relationships with advisors in the past. On the other hand, those who rate themselves as having low agreeableness may take more risks with their investments.
Reactiveness: Do you respond quickly to things?
- LOW: Low reactiveness can be characterized by calmness and emotional stability.
- HIGH: High reactiveness may suggest a tendency to respond negatively to stressful situations
Are you quick to check on your investments when the market takes a downturn? Do you get anxious about your portfolio when you hear about the stock market is in the news? Then you might rank higher on the reactiveness scale.
According to the report’s findings, people who identified as working in volatile industries may be more likely to be higher on the reactive scale. They may also be less able to stick to their investment plan during a market downturn.
Interestingly, the report also noted that those with a volatile income or who work in a volatile industry are 2.5 times more likely to select a volatile portfolio, which is a portfolio that is likely to lose money in multiple years but can offer the potential of higher long-term growth.
Extraversion: Are you outgoing? How confident are you?
- LOW: Low extraversion may be indicative of a more reflective personality
- HIGH: High extraversion may be characterized by an outgoing nature and the tendency for quicker decision making
If you are more extraverted, the report found that those who identify as extraverted individuals may be more likely to assess themselves as being knowledgeable and confident investors. And they are likely to stick to their investment strategy during a market downturn.
Those who claimed to be knowledgeable and confident investors were 3.5 times more likely to prefer a more volatile portfolio (a portfolio that is likely to lose money in multiple years but offers the potential of higher long-term growth) than those who do not claim to be knowledgeable and confident.
But, there’s a potential downside to extraversion as well. Highly extraverted or overconfident individuals may take more risks with their investments and can pay higher prices for financial assets. They may also end up with more overpriced assets in their portfolio, as compared to investors who are more introverted.
Openness: Are you a receptive person?
- LOW: Low openness may be indicative of a safer, more pragmatic personality
- HIGH: High openness may indicate a willingness to experiment in pursuit of ideals or higher ambitions
People are more open think of themselves as more knowledgeable and confident investors and tend to take more risks.
What you can do as an investor
It’s important to know that none of these personality traits are “good” or “bad.” It’s about understanding how your personality can affect your investment style and working with an advisor to align your investment strategy with your risk appetite and goals.
Here are some things to consider when investing with an advisor:
- Work with an advisor you like and trust
Having a candid relationship with an advisor you like and trust can help you develop the right plan for you, especially when they have a better understanding of your personality. Plus, they’re there for you to ask questions and help you make the right decisions. They can help balance out your risk or encourage you to take more well-informed risks with your portfolio.
- Have a plan
You and your advisor can create a goal-based plan to take stock of your financial goals, your timelines and your risk tolerance, and ultimately create the right investment plan for you.
- Be open to change
Your investment plan is a living, breathing document. It should be updated regularly, especially if you experience a major life event, like having a child, a family death, marriage, divorce, and buying or selling a business.
To learn more about your investor personality, check out the TD Wealth Personality introductory assessment tool. To get started with a TD Wealth Financial Planner or advisor and take the full Wealth Personality assessment, visit td.ca.
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