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- New report provides in-depth global analysis into financial personalities of the wealthy
- Financial self-control strategies used less in the UK, despite their link with investment performance
- Emotions that tempt us to buy high and sell low can cost investors nearly 20% in returns over ten years
- Those with £10m+ top list in desire for more financial discipline
Despite their net-worth, a third (33%) of wealthy individuals in the UK wish they had more self-control over their financial behaviour, says the latest report in the Insights series. Interestingly, of all global respondents, a need for increased financial discipline is likely to be felt most by those at the wealthiest end of the scale (£10m+), where 45% of respondents wish they had more self-control. This is despite the report showing that those who want self-control are less likely to be satisfied with their financial situation.
Published today, the report, Risk and Rules: The Role of Control in Financial Decision Making, is based on a survey of 400 high net worth individuals in the UK and more than 2,000 across the globe, and provides an in-depth examination of wealthy investors from a behavioural finance perspective. It considers the different financial personality traits that exist amongst wealthy investors, and the different self-imposed rules and strategies that 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 the report shows that those who employ high strategy usage have on average 12% more wealth than those who do not use rules.
When compared to respondents across the globe, those in the UK actually have a lower desire for financial discipline than most. Globally, 41% of high-net worth individuals wish they had more self control over financial behaviour, with the figure rising as high as 86% in Taiwan and 70% in Hong Kong.
Greg Davies, Head of Behavioural Finance at Barclays said: "Despite the fact that we show less of a desire for self-control in the UK, 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 that 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."
David Semaya, Head of UK and Ireland Private Bank at Barclays said: "This report provides an in-depth study into the financial personalities of wealthy investors in the UK and gives a fascinating insight into their behaviour. When it comes to financial discipline, there is a desire for more control which presents an interesting challenge for the wealth management industry. Clearly, more needs to be done to help clients understand their financial personality and the benefits of using financial self-control strategies."
Emotional trading and lost returns
In order to understand investment behaviour and the pitfalls that 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 can tempt us to buy high and sell low, which can cost investors nearly 20% in lost returns over a ten-year period†. 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 shows that UK respondents use many types of decision-making strategies to control their decision-making process, and use rules more in financial decision making (83%) than they do in everyday life (62%). The most popular include waiting before executing a financial decision (90%) and setting deadlines (87%).
Despite this, the use of rules is much less popular in Britain than across the globe, where 89% use rules in finance and 73% in their everyday life. The most popular rules globally include using cooling-off periods (92%) and setting deadlines (90%).
The report shows that a combination of strategies is most often employed as people tend to take the multiple approaches of; involving others, being more structured and/or removing temptation.
Greg Davies adds: "If we attempt to follow a fully "rational" path without self-control the effects are clear - we will overtrade, and we will buy high and sell low. As a result we will be less effective and less satisfied investors. In order to prevent this we need to take steps to facilitate our efforts to exert self-control.
"This can only happen if we give something up, such as our flexibility to responding to market movements with knee-jerk reactions, or it may mean sacrificing a small amount of the performance of the "rational" portfolio in order to ensure that we have a portfolio with which we're emotionally comfortable in the short term."
The Zen of Ageing
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.
* This effect was found in a study commissioned by Barclays at the Cass Business School from 1992 to 2009. The total return of UK equity funds was 6.5% but the average investor earned only 5.3%. Compounded over 10 years this difference is quite significant – it is a sacrifice of nearly 20% of one's return. Many other studies have shown similar results.
For further information contact:
Cohn & Wolfe
+44 (0) 20 7331 5309
Louise Pancott,Corporate Communications
+44 (0) 20 3134 7303