Larry Swedroe: Know Your Investor Personality

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Random Walker
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Larry Swedroe: Know Your Investor Personality

Post by Random Walker » Fri Jul 13, 2018 7:23 am

http://www.etf.com/sections/index-inves ... nopaging=1

We all have our own unique ability, willingness, and need. Turns out questionnaires are quite poor at helping us determine these for ourselves. We are all influenced by numerous cognitive and emotional biases. Larry reviews an article where the author divides investors into 4 categories (conservative, moderate, growth, aggressive) and describes the biases likely present in each type. The best defense against these biases is to learn of them so we can potentially identify them in ourselves. Larry makes several book recommendations in the article.

Dave

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nedsaid
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Re: Larry Swedroe: Know Your Investor Personality

Post by nedsaid » Fri Jul 13, 2018 9:53 am

Larry touched on a couple things here that I agree with. First of all, I am skeptical of the investor questionnaires used to judge an investor's risk tolerance. My belief is that these questionnaires have a bias towards a higher stock allocation. A good rule of thumb is to take the stock allocation recommended from the questionnaire and subtract 10% to 15%. So if 80% stocks is recommended, you might invest at 70% stocks or even 65% stocks. People overestimate their ability to deal with losses inflicted by a bear market. Erring on the side of conservatism isn't a bad idea.

Second, there is the question of bias. We all have biases and we have them without realizing it. The old story about blind spots. Belief affects perception and thus we tend to see what we want to see. A corny example of this was that I didn't know what a Subaru Outback station wagon was until my neighbor pulled into her parking space with one. All the sudden, I saw those darned things all over the place. It seemed like every other car on the road was a Subaru Outback. This is why all investors would benefit from objective financial advice. We all have flaws in our beliefs and thus our perception. I know this is heresy on a do-it-yourself investing forum but I believe this to be true.
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Re: Larry Swedroe: Know Your Investor Personality

Post by TheTimeLord » Fri Jul 13, 2018 9:57 am

While it may seem counter intuitive, the more I have, the more conservative have been investing because I have more to lose. I have been very aware of this change occurring over the past 5 years.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

Random Walker
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Re: Larry Swedroe: Know Your Investor Personality

Post by Random Walker » Fri Jul 13, 2018 10:43 am

TheTimeLord wrote:
Fri Jul 13, 2018 9:57 am
While it may seem counter intuitive, the more I have, the more conservative have been investing because I have more to lose. I have been very aware of this change occurring over the past 5 years.
Same here. I was surprised. Of the 4 categories mentioned, I seemed to fall most in conservative.

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Re: Larry Swedroe: Know Your Investor Personality

Post by deltaneutral83 » Fri Jul 13, 2018 11:16 am

Random Walker wrote:
Fri Jul 13, 2018 10:43 am
TheTimeLord wrote:
Fri Jul 13, 2018 9:57 am
While it may seem counter intuitive, the more I have, the more conservative have been investing because I have more to lose. I have been very aware of this change occurring over the past 5 years.
Same here. I was surprised. Of the 4 categories mentioned, I seemed to fall most in conservative.

Dave
I imagine most BH would skew more toward conservative.

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TheTimeLord
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Re: Larry Swedroe: Know Your Investor Personality

Post by TheTimeLord » Fri Jul 13, 2018 11:27 am

deltaneutral83 wrote:
Fri Jul 13, 2018 11:16 am
Random Walker wrote:
Fri Jul 13, 2018 10:43 am
TheTimeLord wrote:
Fri Jul 13, 2018 9:57 am
While it may seem counter intuitive, the more I have, the more conservative have been investing because I have more to lose. I have been very aware of this change occurring over the past 5 years.
Same here. I was surprised. Of the 4 categories mentioned, I seemed to fall most in conservative.

Dave
I imagine most BH would skew more toward conservative.
Well the 100/0 to 70/30 crowd is very vocal then. Or maybe I am just over sensitive to their posts.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]

Random Walker
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Re: Larry Swedroe: Know Your Investor Personality

Post by Random Walker » Fri Jul 13, 2018 11:48 am

Boy, Timelord and I are on the same page of the play book today.

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Re: Larry Swedroe: Know Your Investor Personality

Post by grok87 » Fri Jul 13, 2018 11:56 am

TheTimeLord wrote:
Fri Jul 13, 2018 9:57 am
While it may seem counter intuitive, the more I have, the more conservative have been investing because I have more to lose. I have been very aware of this change occurring over the past 5 years.
Many people think this is why the equity risk premium exists and will persists. I would add “and may even become stronger”. Stock ownership is increasingly being concentrated in fewer and fewer hands whose risk tolerance becomes less as wealth increases.
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Re: Larry Swedroe: Know Your Investor Personality

Post by BogleMelon » Fri Jul 13, 2018 12:32 pm

Conservative Investors
Mental accounting: Treating different pockets of assets differently, they tend to use a “bucket” approach instead of evaluating the portfolio as a whole.

Mental accounting is something investors can not completely avoid whether conservative or not. One example of when you can't avoid the bucket system: You can't use your 401K account to pay your rent/mortgage if you are younger than 59 years old. Thus, even investors who are willing to take more risks can not avoid treating the 401K bucket as a different bucket than the bank account bucket due to government regulations.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Re: Larry Swedroe: Know Your Investor Personality

Post by deltaneutral83 » Fri Jul 13, 2018 12:46 pm

TheTimeLord wrote:
Fri Jul 13, 2018 11:27 am
deltaneutral83 wrote:
Fri Jul 13, 2018 11:16 am
I imagine most BH would skew more toward conservative.
Well the 100/0 to 70/30 crowd is very vocal then. Or maybe I am just over sensitive to their posts.
Yes and No. Swedroe also points out once you know which of the 4 categories you belong in, you can identify your weaknesses and have the opportunity to address them. I think it's perfectly possible for someone under the age of 45 to be 100/0, be a conservative investor, but has addressed the concerns the conservative investor experiences, and pushes through times like 2008 based off knowledge and history and keeps the shouting voice to run for the exits in the back of their mind at bay.

It was interesting to read through the playbook on each of the 4 types. Regardless of which one you are, if you don't address your weaknesses, it won't matter if you're 100/0 or 30/70, especially if you time the market, tinker frequently, don't save any money, etc etc.

This one hits the nail on the head for several people I know from the growth investor:
Representativeness bias occurs due to a flawed perceptual framework when processing new information. To make new information easier to process, some investors project outcomes that resonate with their own pre-existing ideas.

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Re: Larry Swedroe: Know Your Investor Personality

Post by TheTimeLord » Fri Jul 13, 2018 2:39 pm

BogleMelon wrote:
Fri Jul 13, 2018 12:32 pm
Conservative Investors
Mental accounting: Treating different pockets of assets differently, they tend to use a “bucket” approach instead of evaluating the portfolio as a whole.

Mental accounting is something investors can not completely avoid whether conservative or not. One example of when you can't avoid the bucket system: You can't use your 401K account to pay your rent/mortgage if you are younger than 59 years old. Thus, even investors who are willing to take more risks can not avoid treating the 401K bucket as a different bucket than the bank account bucket due to government regulations.
Love me some mental accounting and my buckets, oh yeah!
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Re: Larry Swedroe: Know Your Investor Personality

Post by GAAP » Fri Jul 13, 2018 4:12 pm

It has always amazed me that anyone can do a personality assessment with those questions. When I've bothered to take them, the answers really seem to need qualifiers while the questions expect absolutes.

After reading and re-reading Larry's article, I can't place myself in any of those groups -- and I'm certain that I'm far more rational than that...

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Re: Larry Swedroe: Know Your Investor Personality

Post by mary1969 » Fri Jul 13, 2018 5:01 pm

The person who falls under aggressive has to be careful. They not only invest aggressively but they live aggressively. Too much house, expensive cars, side biz deals etc....When things get ugly (2008/09) they don't have the liquidity to weather the storm.

100% stocks with a country club, second home, big mortgage, expensive cars and schools is a recipe for disaster.

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Re: Larry Swedroe: Know Your Investor Personality

Post by Dale_G » Fri Jul 13, 2018 5:01 pm

I guess we all have to give up and hire an FA. Does anyone know of a FA who doesn't have his/her own biases?

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Re: Larry Swedroe: Know Your Investor Personality

Post by Dead Man Walking » Sat Jul 14, 2018 12:08 am

An important aspect of determining which type of investor one is is the time period one lived through when he/she became an investor. I began investing during the 1970's. Inflation, astronomical interest rates, poor equity returns, and stagflation have greatly influenced my investment behavior. An investor who began investing in 2008 and one who began investing in 2018 may have totally different perspectives. The difference is only one decade.

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Re: Larry Swedroe: Know Your Investor Personality

Post by magneto » Sat Jul 14, 2018 9:18 am

Dale_G wrote:
Fri Jul 13, 2018 5:01 pm
I guess we all have to give up and hire an FA. Does anyone know of a FA who doesn't have his/her own biases?
Yes seemingly each investor type is riddled with defects, and needs the strong guidance of an FA.

QUOTE
"Conservative Investors
Their risk tolerance is low and they tend to make emotional errors. Being worriers, they tend to place great emphasis on financial security and preserving wealth, and to obsess over short-term performance."
UNQUOTE

As a 'Conservative Investor', disagree strongly with some of these supposed inbuilt defects.
Risk exposure can be adjusted dependant on what the various Asset Classes offer.
Emotion taken out by using measurement and an Investment Plan.
Short-Term performance matters not one jot, to a methodical investor.

But then presumably articles have to be written and duly promoted to drum up business :(
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Re: Larry Swedroe: Know Your Investor Personality

Post by JPH » Sat Jul 14, 2018 10:17 am

I'm pretty skeptical of this. How do we know that they can validly classify people into those four categories? Do those really exist? Or is it pseudo explanation by naming? Seems very simplistic. I could make the opposite argument that classifying people into four categories is inadequate, and we really need a validated questionnaire to reveal behavioral biases.
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Re: Larry Swedroe: Know Your Investor Personality

Post by tioscrooge » Tue Jul 17, 2018 10:58 am

In my previous life, I was a fortune teller (seriously). I told people they were Martian, Mercurian, Jupitarian etc based on their personality traits, and of course made predictions. Due to the fact that I could only remember predictions that came true, I considered myself a good one :)

In my professional career since, I have come across a lot of consultant gobbledeegook about how to categorize employees. Every year, there is a new scheme - with fancy names. Take collaborative, persuasive, assertive, follower, leader, etc depending on which consultant or speaker is promoting them. There are no differences in an astrologer telling you are Jupitarian vs a consultant telling you are a Follower or a Conservative Investor personality.

If you don't identify with ALL the characteristics of the class, I would always say you have some trait of Mercury because you were born on XYZ or some such made up stuff. Thus the skeptic is under the influence of or blend of two or more planets. Just boost the ego (say they are special) and they will be happy.

I think this investor personality types article falls in that category. If you are the person who reads your daily horoscope, you will learn something from this article. If not, you will find reasons why you are not in the right category.

(for those interested - Full Fact Book of Cold Reading - is a good book about the secrets of psychological manipulation astrologers successfully use, and how to overcome them)

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Re: Larry Swedroe: Know Your Investor Personality

Post by livesoft » Tue Jul 17, 2018 11:37 am

To put a positive spin on this missive from Swedroe, I think he should write about the "perfect" investor in each category and how that investor behaves and avoids the biases Swedroe listed. :twisted:
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Re: Larry Swedroe: Know Your Investor Personality

Post by willthrill81 » Tue Jul 17, 2018 12:12 pm

BogleMelon wrote:
Fri Jul 13, 2018 12:32 pm
Conservative Investors
Mental accounting: Treating different pockets of assets differently, they tend to use a “bucket” approach instead of evaluating the portfolio as a whole.

Mental accounting is something investors can not completely avoid whether conservative or not. One example of when you can't avoid the bucket system: You can't use your 401K account to pay your rent/mortgage if you are younger than 59 years old. Thus, even investors who are willing to take more risks can not avoid treating the 401K bucket as a different bucket than the bank account bucket due to government regulations.
I see pros and cons to both traditional AA and bucket approaches, mostly with regard to how investors think about and react to them behaviorally.

I think that the anti-bucket folks rely too much on the 'money is fungible, so buckets will lead to sub-optimal decision making' argument. Are these same people quick to jump on retirees who want a 30/70 AA while knowing that the historic optimum AA to maximize the safe withdrawal rate has been around 70/30?

The bottom line is that there is a lot more to personal finance than making 'mathematically optimal' decisions.

I heard a good statement from Paula Pant's Afford Anything podcast episode yesterday. She said that financial equations are only mathematical representations of thought processes, and different thought processes imply different equations. There is no one right answer.
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Re: Larry Swedroe: Know Your Investor Personality

Post by Random Walker » Tue Jul 17, 2018 12:32 pm

livesoft wrote:
Tue Jul 17, 2018 11:37 am
To put a positive spin on this missive from Swedroe, I think he should write about the "perfect" investor in each category and how that investor behaves and avoids the biases Swedroe listed. :twisted:
A written investment policy statement that the investor adheres to is a strong start towards avoiding many behavioral problems. Of course, Larry continuously writes about the importance of having a sound plan and sticking to it.

Dave

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Re: Larry Swedroe: Know Your Investor Personality

Post by lws » Tue Jul 17, 2018 1:00 pm

Some people say psychology is useless. I don't think so.

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Re: Larry Swedroe: Know Your Investor Personality

Post by Fallible » Tue Jul 17, 2018 6:59 pm

lws wrote:
Tue Jul 17, 2018 1:00 pm
Some people say psychology is useless. I don't think so.
If you're referring to psychology as scientific study of the mind, it certainly can be quite useful. Good examples of it for investors are the books Thinking, Fast & Slow (as suggested here by Larry), Predictably Irrational by Dan Ariely, Your Money & Your Brain by Jason Zweig, "The Psychology of Investing" section of Bill Bernstein's The Four Pillars of Investing, and many others.

Good books and blogs like these can help all investors, whether going with an advisor or DIY. Either way, we first need to understand ourselves.
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Re: Larry Swedroe: Know Your Investor Personality

Post by Dead Man Walking » Tue Jul 17, 2018 11:38 pm

Random Walker wrote:
Tue Jul 17, 2018 12:32 pm
livesoft wrote:
Tue Jul 17, 2018 11:37 am
To put a positive spin on this missive from Swedroe, I think he should write about the "perfect" investor in each category and how that investor behaves and avoids the biases Swedroe listed. :twisted:
A written investment policy statement that the investor adheres to is a strong start towards avoiding many behavioral problems. Of course, Larry continuously writes about the importance of having a sound plan and sticking to it.


Dave
Dave,

One's written IPS will be influenced by the times which he/she experienced early in his/her investment experience. This history will influence the risk tolerance of most investors. The soundness of the plan may be questioned by others. Sticking to the plan is a probably the failure of many investors.

DMW

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Re: Larry Swedroe: Know Your Investor Personality

Post by Top99% » Wed Jul 18, 2018 7:05 am

Dead Man Walking wrote:
Tue Jul 17, 2018 11:38 pm
Random Walker wrote:
Tue Jul 17, 2018 12:32 pm
livesoft wrote:
Tue Jul 17, 2018 11:37 am
To put a positive spin on this missive from Swedroe, I think he should write about the "perfect" investor in each category and how that investor behaves and avoids the biases Swedroe listed. :twisted:
A written investment policy statement that the investor adheres to is a strong start towards avoiding many behavioral problems. Of course, Larry continuously writes about the importance of having a sound plan and sticking to it.


Dave
Dave,

One's written IPS will be influenced by the times which he/she experienced early in his/her investment experience. This history will influence the risk tolerance of most investors. The soundness of the plan may be questioned by others. Sticking to the plan is a probably the failure of many investors.

DMW
Sticking to to the plan is indeed the challenge. Just go back and read some of the threads initiated during the GFC (Great Financial Crisis). As Mike Tyson says, everyone has a plan until they get punched in the face. As others have alluded to, I think one's risk tolerance is also related to age. I viewed the Tech Bubble crash and GFC as buying opportunites because I was in the accumulation phase. Now that I am gradually transitioning to depending on our nest egg I am not quite sure how I will view the next crash. I definitely have a more conservative and (hopefully) diversified portfolio. But, back to the article, I don't think one knows their true risk tolerance until the risk shows up.
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Random Walker
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Re: Larry Swedroe: Know Your Investor Personality

Post by Random Walker » Wed Jul 18, 2018 9:18 am

Dead Man Walking wrote:
Tue Jul 17, 2018 11:38 pm
Random Walker wrote:
Tue Jul 17, 2018 12:32 pm
livesoft wrote:
Tue Jul 17, 2018 11:37 am
To put a positive spin on this missive from Swedroe, I think he should write about the "perfect" investor in each category and how that investor behaves and avoids the biases Swedroe listed. :twisted:
A written investment policy statement that the investor adheres to is a strong start towards avoiding many behavioral problems. Of course, Larry continuously writes about the importance of having a sound plan and sticking to it.


Dave
Dave,

One's written IPS will be influenced by the times which he/she experienced early in his/her investment experience. This history will influence the risk tolerance of most investors. The soundness of the plan may be questioned by others. Sticking to the plan is a probably the failure of many investors.

DMW
I agree big time with you that we can be overly influenced by our early investing experience. My first decade investing was basically 1998-2008. I frequently say I had a lifetime of experience in one decade with stock market bubble, 2 stock crashes, real estate bubble pop. I sometimes wonder if I’ve been more scarred than educated by the experience. That being said, once an IPS is in place and mechanistically followed, doesn’t that by definition eliminate behavioral error?
The type of error you describe in initial development of the plan can be averted with Monte Carlo Simulation. One can set reasonable goals for saving and pretty rationally take advantage of MCS to develop an AA likely to achieve the goals. From there, mechanistically stick to the AA and IPS. MCS uses forward looking expected returns based on current valuations, and this could help the investor eliminate any problems associated with making decisions based on his early formative investing experiences.

Dave

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Re: Larry Swedroe: Know Your Investor Personality

Post by drk » Wed Jul 18, 2018 10:54 pm

JPH wrote:
Sat Jul 14, 2018 10:17 am
I'm pretty skeptical of this. How do we know that they can validly classify people into those four categories?
I share your skepticism. Much like the zodiac, I can see myself in each of these categories.

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