Thought of the Week - Your investment portfolio has nothing to do with who you are.
I am passionate about markets and investments. In the past, that has led me, like so many professional and retail investors who are similarly passionate, to think of my investment outcomes as a reflection of my personality, intelligence, knowledge, etc. After all, the entire field of behavioural finance focuses on how our traits and biases influence our investments. Shouldn’t that mean that in return good investment outcomes reflect well on our personality?
Every experienced investor knows that a bull market can make you feel like a genius (crypto investors in 2021) while a bear market can make you feel like an idiot (practically every investor in 2022). But if we turn this around, should investors with a high IQ be able to spot the hype and achieve better performances in the long run? Shouldn’t investors who are more conscientious and more detail-oriented have an edge in analysing companies and thus have better performances on average?
A study by Christopher Firth and his colleagues made use of a large dataset of UK retail investors. The great thing about their study is that they tried to measure the personality traits of investors as well as their IQ and other factors and then analysed to what extent these traits influenced their investment behaviour and their returns.
Unfortunately, the results are generally so small as to make hardly any difference. There is no correlation between IQ and returns. Yes, on average, people with a higher IQ have slightly better returns, but the difference is not statistically significant. The only statistically significant correlation with IQ was that people with a higher IQ tended to trade less, which we know is correlated with better returns in the long run. But don’t for a moment think that your investment returns say anything about your IQ.
Similarly with personality traits. Looking at the Big five personality traits, the best the study could find was that highly conscientious people had slightly better returns on average while highly extrovert people had slightly worse returns. Both conscientious and extrovert people tend to be more overconfident in their abilities, which, of course, helps reduce performance.
In short, it is a mess.
Every person has a complex and varied set of personality traits, habits, and biases. Each of these traits individually influences our investment decisions sometimes for the better, sometimes for the worse. The interaction between all these individual biases can in sum end up making your performance better or worse. But a good investment outcome is not a reflection of your personality or your intelligence. It reflects how well you know yourself and how well you know your weaknesses and strengths – how well you play towards your strengths while reducing the impact of your weaknesses.
Your investment portfolio is a tool to get to know yourself, not a reflection of who you are. It is a feedback machine about how well you know yourself. Listen to the feedback your investments will give you and you learn a lot about yourself. Use this knowledge about yourself to change your behaviour and your investments will improve. It’s as simple as that.
PS: Because investment success is not a reflection of your personality or IQ, STOP CELEBRATING STAR INVESTORS. Warren Buffet and Cathie Wood are neither smarter nor dumber than other people. It’s just that Warren has found a way to invest that plays to his strengths. Does that mean that copying his investment style is right for you? Of course not. You are not Warren Buffet, so stop looking at what he does.
Thought of the week features investment-related and economics-related musings that don’t necessarily have anything to do with current markets. They are designed to take a step back and think about the world a little bit differently. Feel free to share these thoughts with your colleagues whenever you find them interesting. If you have colleagues who would like to receive this publication please ask them to send an email to firstname.lastname@example.org.