Barclays Wealth Report: HNW Investors Want More Financial Discipline

4.    South Africa

5.    UAE

 “Many people will be surprised to see that wealthy individuals have a desire for greater financial discipline; however, with increased wealth comes an increased complexity of investment decisions,”Greg Davies, head of behavioral finance at Barclays Wealth, said in a statement. “The key thing that investors

need to consider is how these decisions might fit in with their overall investment strategy, and importantly, how they fit in with their individual requirements, both financial and emotional.”

The Buy-High, Sell-Low Trap

In order to understand investment behavior and the pitfalls to which investors may be prone, the report considers three personality dimensions: risk tolerance, composure and promotion vs. prevention.

It reveals an interesting pitfall on the theme of emotional trading, which can tempt investors to buy high and sell low, costing them nearly 20% in lost returns over a 10-year period. Limitations of self-control lead to what the report identifies as the trading paradox.

Globally, 32% of those polled say that trading frequently is necessary to get a high return; however, these respondents are more than three times likelier to believe they trade too much. In total, 46% of respondents who believe they have to trade often to do well think that emotions force them to do this.

This could lead to them to become unable to control how often they trade. Of all the personality types, the most likely to fall into this category are those with low composure, high risk tolerance and a high prevention focus, according to the report.

Rules Rule

Wealthy respondents see the use of rules and strategies in financial decision making as hugely effective. These provide increased financial satisfaction, and are associated with higher wealth levels for those who report wanting more financial discipline. Comparing the group with the highest strategy usage to the lowest strategy usage, the study saw a 13% boost in financial satisfaction and a 12% boost in wealth.

The report shows that investors use many types of strategies to control their decision-making process, and use rules more in financial decision making (89%) than they do in everyday life (72%). The most popular include using cooling-off periods (91%) and setting deadlines (90%).

Delegating to others (72%) and limiting options (64%) are less popular strategies, although both those with inherited wealth and those with an increasing level of wealth are more likely to rely on others and delegate financial decisions.

The report shows that a combination of strategies is most often employed as people tend to take the approach of involving others, being more structured and/or removing temptation.

 “If we attempt to follow a fully ‘rational’ path without self-control, the effects are clear—we will overtrade, and we will buy high and sell low,” Davies said. “As a result, we will be less-effective and less-satisfied investors. In order to prevent this, we need to take steps to facilitate our efforts to exert self-control.”

He said this can happen only if investors give up something, such as flexibility to respond to market movements with knee-jerk reactions, or a small amount of the performance of the "rational" portfolio in order to ensure that they have a portfolio with which they are emotionally comfortable in the short term.

The report also shows that a desire for greater financial discipline declines markedly with age, from 53% of those aged 45 and under wanting more control over their financial behavior to just 26% of those over 65. This in turn results in less need for the use of strategies. It is also associated with a decrease in stress and an increase in financial satisfaction.