Investment decisions based on your personality

L-plate Taking the first decisions in investments - as with learning to drive - can be daunting

A learner driver's natural instinct, when their vehicle is veering to the left, is to overcompensate and find the car is swerving to the right.

With experience, the driver learns how to maintain a steady course by taking stock of where they are on the road and making slight adjustments as they go along.

The same can be argued for making choices about financial investments. Panic buying and selling when markets plunge or soar might not be the best course for what is generally a long-term strategy - even if that feels like the thing to do.

Trying to ignore those natural instincts is a mistake, says Greg Davies, the head of the behavioural finance team at Barclays. Instead, he says, people should recognise how their emotions can affect their financial decision making.

"People are much more comfortable taking risks when times are good, when markets are high, not when there is crisis and panic," he says.

"Yet, selling out at the bottom of the market and sitting on the cash may be costly."

Mr Davies is an evangelist for considered investing. He only allows himself to make his own investment decisions at the weekend, when he has time to sit down to think about them.

Personality assessment

He heads a relatively unusual team at Barclays, which encourages people - both within the bank and their clients - to consider psychology before making investment decisions.

Greg Davies Greg Davies says that a set of rules can save investors from making bad decisions on a whim

The Barclays behavioural finance team was set up in 2006, and was the first of its kind established by a bank.

It asks clients to complete a financial personality assessment that is aimed at tailoring their investment portfolio to their psyche.

Mr Davies says that this goes beyond the typical financial adviser's questions about attitudes to risk, level of exposure to market movements, and how active a part clients want to play in shifting their investments around.

This means, ultimately, that the client - or even the fund manager - can draw up a set of rules to govern their investment behaviour, a bit like Mr Davies' own "weekend-only" investment rule.

That makes it easier to stick to good investment habits.

"And better financial decisions make them happier," he says.

Tips and pitfalls

The new year tends to be a time when people consider their financial options.

Graph Investments can go down as well as up so careful thought is needed

So, having detailed the personalities of many investors, what are the traits, tips and pitfalls that Mr Davies has drawn from the experience?

The biggest mistake, he says, is failing to invest at all, and "sitting on piles of cash" instead. People are understandably nervous about taking the first step in investment.

Investments, of course, can go down as well as up. So, his second pitfall to avoid is the failure to rebalance a portfolio that may have led an investor to buy high and sell low.

Thirdly, he has noticed that investors lean towards putting their money into companies that they know. That means investing in UK companies, or simply following the suggestions made at dinner parties.

New rules

Equities - shares in companies - remain popular among investors, the latest figures show, especially those in the UK.

This can range from Individual Savings Accounts (Isas) to funds that pool people's money for investment in these shares.

Market trader UK equities - shares in companies - have been popular with investors since the financial crisis

The Investment Management Association said that equity funds were the strongest sellers for the third month in a row in November, with net retail sales of £720m during the month.

The figures show that UK equity income funds accounted for £221m of these sales in November, and have been the biggest sellers since September 2008.

"Many investors were looking to cash as a safe haven in the face of economic uncertainty, but these statistics suggest that may be slowing as we see an inflow back into Isas again," says Jason Chapman, managing director at broker Willis Owen.

This is mainly the result of investors deciding that the world of business is in better shape than governments.

Ultimately, experts suggest that investors cannot sit on their hands. A new year review would not be a bad idea, they say.

Colin Lawson, managing partner of wealth management firm Equilibrium, says that it is worth investors checking what fees they are paying, especially in the light of new rules that prevent financial advisers being paid commission by the firms whose policies they are selling.

He says it is worth reviewing the performance of long-term investment plans every six months, and assessing whether life circumstances have changed so the investor might want something different from these funds.

Greg Davies would argue that all these choices should be made while in full control of emotions.

But recent years have shown the high finance can often create high drama.

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