"Your personality has a major influence on your behavior as an investor," says Robert Doll, president and chief investment officer of Merrill Lynch Investment Managers. In a groundbreaking survey of investors, Doll points out one of the fundamental precepts of professional money management: Keep your emotions out of your portfolio.
"In most human endeavors, individual psychology affects behavior and, ultimately, results," Doll notes. "Anyone who has ever gone on a diet or started a workout regimen knows that. Investing is no different. Whether you're trying to shrink your waistline or grow your nest egg, discipline and self-awareness go a long way."
The poll was conducted with participants who had to be solely or jointly responsible for financial and investment decisions for their household, and have at least $75,000 in investable assets and an annual household income of at least $75,000 (retirees did not have to meet this requirement). The margin of error (at the 95 percent confidence level) for the 1,000 investors surveyed is plus or minus 3.0 percentage points.
Investors say that their biggest, and most painful, mistake was waiting too long to start investing. "If experienced investors deeply regret waiting too long to start investing, imagine how large an issue this is with the general population, many of whom haven't even begun to invest," Doll notes. "The survey results are a wake-up call to people in their 20s and 30s: Get going. The benefits of compounding and investing over the long term are substantial; unfortunately, too many investors learn these important lessons in retrospect."
The second most common mistake investors cite is holding a losing investment so long that you end up losing a significant amount of money. Forty-one percent of investors say they had made that mistake--and 24 percent say it was their most painful mistake.
The next most common mistakes were not putting enough money into your investments and waiting too long to sell a winning investment, both of which were mentioned by 36 percent of investors. "Making mistakes comes with the territory," Doll notes. "The best investors learn from them. When it comes to investing, past is not prologue and personality is not necessarily destiny."
According to study director Dr. Brian Perlman, CFO of Greenwald & Associates and a psychologist and Chartered Financial Consultant, "Too many investors focus on fighting the battle but not winning the war. Everyone makes mistakes. What many investors don't understand is the critical role careful planning and professional money management can have in preventing those mistakes from derailing their future financial security."
But there are some troubling counter-indications: Almost one-third of all investors have no financial plan and while nearly 60 percent of investors say they are very good at home or car maintenance, only 29 percent maintain they are very good at managing their investments.
The analysis indicates four distinct investing personalities: measured, reluctant, competitive, and unprepared. Of the 1,000 investors surveyed, 32 percent were identified as measured, 26 percent as reluctant, 17 percent as competitive, and 11 percent as unprepared; 14 percent did not clearly fall into a category.
Measured Investors are considered secure in their financial situation and confident they will have a comfortable retirement because they've achieved their success by investing early in life and invest and rebalance regularly.
Reluctant Investors are those that do not particularly enjoy investing, preferring to spend as little time as possible managing their investments.
Competitive Investors enjoy investing, trying to beat the stock market, and claiming that they are both happy with their current financial situation and confident in the future. After measured investors, competitive investors are the most likely to have started investing early, to put enough money into their investments, and to invest regularly.
Unprepared Investors are not happy with their current financial situation. In general, they have lower knowledge levels on financial topics and express the deepest regret about not investing sooner. They do not feel they will have a secure retirement--with reason.
Experts at Merrill Lynch say it's critical for investors to understand their psychological make-up. They note that money is an emotional instrument and that emotions can get in the way of making the right investment decisions.
Doll points out that the mistakes which may be mitigated, particularly by professional management, are: holding onto losers, waiting too long to sell winners, over-allocation into one investment, too frequent trading, and buying "hot" investments without doing research.
The bottom line is that the first step in eliminating or reducing investing mistakes is for investors to get a better understanding of their investing personality.
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