If you’ve found yourself thinking, “Only a crazy person would buy bonds these days,” you could be right. A new study from researchers at Northwestern, DePaul University and the London School of Economics finds that five major personality traits have a big influence on your approach to investing. We’ll discuss the details.
A financial advisor can answer your investing questions, while also helping you build a financial plan for the future.
Your Personality Trait Could Explain Your Investment (Or Lack Thereof) in Stocks
In a working paper recently published by the National Bureau Of Economic Research, researchers found that the five major personality traits have a big influence on your approach to investing. And that’s including risk aversion and economic expectations. In fact, two of those traits play the biggest role.
While we tend to believe that characteristics such as age, wealth, intelligence and financial literacy influence financial decisions, the researchers found that those elements failed to be completely accurate indicators of how we approach investing.
Instead, they found a significant correlation between investing decisions. And the “big five” major personality traits are: extraversion, agreeableness, openness, conscientiousness and neuroticism.
“When explaining expectations about stock market returns, the explanatory power of the five personality traits… is comparable to that of all demographic variables combined,” the researchers found.
Personalities That Can Lead You to or Away From Stocks
If you’re a moody person who tends to be neurotic – prone to anxiety, anger, frustration, jealousy, guilt, depression and loneliness – you’re likely to stay away from investing in stocks.
The same goes for guarded people characterized as having a low level of openness who lack sensitivity, active imaginations, a preference for variety and adventure and intellectual curiosity. It can also include a problem with authority.
But just because the two groups of people tend to avoid equities doesn’t mean they’re doing so for the same reasons.
The researchers discovered “High neuroticism is associated with pessimistic beliefs about future stock returns and tail risks… whereas low openness is associated with high-risk aversion.”
Pessimism, Optimism and The Economy
So, if you’re feeling gloomy about the economy and the potential returns on stocks, you might want to stop and ask yourself: “Is it the market – or me?” Sometimes there are valid reasons. The rise of inflation over the past year and the cost-of-living can leave a lot of doubts.
“Investors high in neuroticism are more pessimistic about average future stock returns and assign a greater probability to a crash,” the researchers noted. “They are also more pessimistic about future economic growth and expect higher inflation.”
On the other hand, according to the research, people with personalities that rated high in openness were more willing to take investment risks.
How to Take Educated Risks or No Risk
A financial advisor can help you identify your risks when looking into any investment. They help remove the emotions out of your financial decisions whether they are positive or negative. If you’re feeling pessimistic about your chances of investing, a financial advisor can help you gain confidence. They can also show you multiple income streams that can help you sustain long-term growth.
Bottom Line
Being willing to take on risks in investing can change your financial outlook for the better. It can also change your financial outlook for the worst depending on your investments. In the end, there’s no definitive right or wrong decision.
But that’s why many investors try to take chances. But it’s always good to take calculated risks. Studying and researching investments can help take your emotions out of investing. Investing based on your emotions often leads to negative results in itself.
Tips For Investing
- If you want to learn about investing, the services of a financial advisor could be helpful. They can help you navigate investing for the first time. And they can also help you figure out what might be the best way to invest your money. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area. And you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A robo-advisor is a unique alternative to a financial advisor. They can automatically manage your investments based on your investor profile. In addition, Robo-advisors typically have lower fees and account minimums. This makes them a good option for newbie investors with less money to invest.
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