Guess what? Your personality, whether it's flamboyant and extroverted or low-key and cautious, influences your investment decisions.
The relationship between investment and personality-type is becoming clearer thanks to research in the specialist area of behavioural finance in Australia and overseas.
Groundbreaking research by University of Melbourne honours student Ben Samild and senior lecturer Dr Jeff Pressing, who specialises in behavioural finance in the psychology department, identifies three broad types of investor found operating in the stockmarket. They are "contrarians", "trend followers" and "hedgers and holders".
Their colleague Dr Kim Sawyer, a financial theorist in the university's department of finance, identifies similar investment types, in four broad categories.
The "contrarian" is a risk-taker who does not follow conventional professional advice. Mr Samild defines a contrarian as someone who sees poor historical stock performance as an opportunity for profit rather than an indication of future poor performance.
Dr Sawyer says being contrarian is about buying when the herd says "sell".
"When you see the newspapers featuring the worst about the stockmarkets, (contrarians) know that's the time to buy," he says.
The more conservative "trend followers" tend to invest in products such as bank stocks. Trend followers seek out and listen to financial insiders, following prevailing wisdom and closely observing price and volume changes. Professional financiers usually fall into this category, Dr Pressing says.
In the US, most futures funds adopt a trend-following strategy over a contrarian one. "That's why you don't get much diversification in a lot of the funds because they all have the same approach - trend-following," Dr Pressing says.
"But by mixing trend-following with contrarian (strategies), you can actually improve your portfolio balance."
The third personality type, according to the University of Melbourne research, is the cautiously inclined "hedger and holder"; the stereotypically risk-averse "Mum-and-Dad" investor.
Last year, for his honour's thesis, Mr Samild decided to examine the impact of these three investment types on the market. He, with Dr Pressing, created a computer-modelled market simulation closely modelled on real markets.
The starting point of the experiment was that the "market" adopted the "random walk" theory which, in simple terms, states you cannot predict market returns from past performance; market movements are random, like a drunk walking down the street.
Dr Pressing and Mr Samild set up their "random walk" market and then added their three trading personalities - the contrarians (who are risk takers), the trend-followers, and the hedgers and holders. Mr Samild used his experience working for a stockbroker, interviews with traders and research to recreate the mock traders' psychological profiles.
What the market model actually revealed was that markets are not random walks at all because, in some cases, the outcomes can be predicted. "The reason (the market wasn't a "random walk") was because these different personality types were interacting as a big sea of agents talking to each other," Dr Pressing says.
"What we found is that the behaviour of these individuals does matter and does have an impact (on market outcomes)."
Although it could be argued that it's obvious that individual units (investors) influence the larger whole (the sharemarket), the two researchers say the simulation model makes such a theory quantifiable and measurable.
Dr Sawyer, in the department of finance at the University of Melbourne, identifies two conservatives classes and two risk-taking classes of investor:
Capital-C Conservative - "buy and hold". These are usually older or Mum-and-Dad investors who buy shares and hold on to them, and do not trade much. They may also hold on to cash only, listed funds or property.
Small-c conservative - "value investors". These investors also buy and hold but trade more and look closely at market information. They are engaged with the market - attend shareholder meetings, read company reports, research companies and actively seek value.
Small-r risk takers - "weekly or monthly traders". Risk-preferring but not day traders. They read the financial pages and financial newsletters.
Capital-R Risk takers - "day traders". Speculators who trade daily in warrants and options, engage in margin lending and other risk-oriented trade. "These are risk preferring, typically younger, male and they often engage in margin lending. They are probably going to be following market sentiment much more quickly."
However, Dr Sawyer stresses that not every investor falls neatly into each category, with some taking on conservative and risk-taking characteristics.
Is there an "ideal" investor type? For his money, Dr Sawyer has an each-way bet. Mostly, he aligns himself with the "value investor".
"I would say long-term, value investing makes sense. I do think (the best thing) to do is pick your company well and then typically hold those shares," he says, adding that the "contrarian" approach (that is, buying when everyone else says sell) has appeal.
Dr Sawyer says anyone can make money in bull markets and he would adopt a more conservative approach in a sideways market.
The question of what makes someone a risk-taker or a more cautious hedger-and-holder is complex. Personal experience, family upbringing, gender, age, location, ethnicity and genetics are all believed to play a role but the jury is still out on how much of each contributes to a person's investment style.
Do you throw caution to the wind and follow your own nose? If so, you're probably a contrarian. Do you pore over the financial pages, read annual reports and carefully research every stock you hold? You're a value investor. Do you have no shares but like something tangible - such as real estate? You're a conservatively inclined, "passive" investor.
Dr Pressing says once you know what your natural inclination is, you need to reconcile that with your financial goals.
If you consistently go against the grain of your natural inclination - say you are naturally cautious but choose to engage in high-risk market trading more suited to the thrill-seeking, zany guy with the crazy tie - you might make yourself miserable and end up suffering from a run of Black Mondays, or even a Great Depression, because you are not "being yourself".
"You have certain predispositions that you inherit and those are things you need to indulge - to a certain extent - for your own personal happiness," Dr Pressing says.
"On the other hand, (your natural inclinations) could be quite bad for you as well. For example, if you are very impulsive by nature, then if you just follow your impulse then you can do very badly with gambling and other things. So the idea is that you recognise (what you are like) but then you impose upon that a layer of judgment."
Anecdotally, financial advisers say men comprise the vast majority of risk-taking investors, while women tend to go for less risky managed funds, a theory shared by Dr Sawyer.
"I think there is a gender bias in terms of investing, for sure and then there's a gender bias in terms of risk preference, as well," Dr Sawyer says.
Dr John Tippet, a senior lecturer in the school of applied economics at Victoria University, seems to have discovered there's also a gender bias when it comes to ethical investment.
Dr Tippet, who completed a PhD thesis on ethical investment last year, found women ethical investors outnumber men two to one.
Some just can't be pigeonholed
It's comforting to categorise. Clearly, modest old grandma has to be a hedge-and-holder, cousin Steve with his purple Merc is a flamboyant speculator and your husband (thank goodness) is a value investor. Right? Not necessarily.
Melbourne financial planner Steven Rowley has seen investor behaviour up close for many years and, although he acknowledges it's possible to generalise about investor "types", there are many who can't be forced into a category.
"I've got a client who is about 86 and she has a $1.4 million share portfolio," says Mr Rowley, the managing director of financial planning firm London Partners Vic.
"She's in a retirement home and has no property at all; she has a direct-equity share portfolio and she's more than comfortable with it. We've actually geared it.
"She's real comfortable with shares because she's had shares for 40 years. Her first purchase in shares was National Australia Bank when it was 67 cents."
Another enthusiastic risk-taker he met was a New Zealander, who had "done his dough" on gold in the mid-1980s. He directed Mr Rowley to convert the 10,000 ounces he had remaining into an equity managed fund with a return of 100 per cent. Mr Rowley tried to talk him out of it but the man was adamant.
Then came the 1987 sharemarket crash, which pummelled his equity returns into the dust.
"He came to see me and he said, 'Oh well, it didn't work; I could've been a billionaire but, as it turns out, I've got nothing.' He cashed it in and went back to New Zealand.
"I always remember that because . . . it was a stupid strategy that he had but at least he was comfortable with what he was doing. He was having a go and he was prepared to lose everything."
At the other end of the extreme, a seemingly risk-shy client in Queensland "absolutely staggered me", Mr Rowley says. This client had property assets worth about $3 million and Mr Rowley's firm set up a share portfolio for him worth about $50,000. The client was conservative, favouring property, and was extremely anxious about the perceived risk in his $50,000 share portfolio.
Soon after, the client went out and bought a $400,000 property in Brisbane - geared to
90 per cent. "I said to him, 'That's far more aggressive than your share portfolio!' The client's thinking was influenced by his experience in property: he felt it was intrinsically far safer than shares, even though the geared property investment was, objectively, much riskier."
Some clients, says Mr Rowley, he could comfortably take a fair risk with but with others he would not even try.
"At the end of the day, clients have got to be able to go home and sleep at night and if they're going to worry about it then I don't care what the return is, it's a pointless investment for them."
What kind of investor are you?
Take this quick tongue-in-cheek quiz to find out.
Each week financial advisor Noel Whittaker answers your
questions.
