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Portfolio > Portfolio Construction

What Your Clients’ Personalities Say About Their Portfolios

By Savita Iyer-Ahrestani

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Contemporary psychologists believe there are five basic dimensions of the human personality. These core traits — extraversion, agreeableness, openness, conscientiousness and neuroticism — are universal, and influence all kinds of human behavior in different ways.

They also influence individual financial behavior and investment patterns, according to a recent study done by Saima Rizvi, associate professor of finance and accounting at the IILM Institute of Business Management in Gurgaon, India.

Rizvi’s research, titled “Behavioral Finance: A Study of Correlation Between Personality Traits with the Investment Patterns in the Stock Market,” links the “Big Five” personality types with stock market involvement. Investing in the stock market is still a relatively new phenomenon in India, Rizvi said, and to date, only around 10% of the population invests directly in stocks.

That should change going forward as income levels in India continue to rise, she said, and studies are starting to emerge that can help Indian investors as well as financial advisors better understand the important role that behavioral finance plays.

For her study, Rizvi first classified 100 participants in an online survey according to their gender, marital status, number of dependents, income and professions, among other things, to see what bearing these factors had on investing.

“I found that age was a significant factor for investing in the stock market, with the age group of 18-30 years being the most actively involved,” she said. “These respondents also tended to be unmarried and had fewer dependents. Male respondents were also more involved in the stock market than their female counterparts, in line with existing behavioral finance theories of overconfidence.”

Next, survey participants took a Big-Five personality test to determine which traits they exhibited. Rizvi matched these up with their investing patterns.

The results, she said, clearly show that the five core personality traits influence stock market behavior.

Based on the study’s results, people with a strong conscientiousness trait – the tendency to show self-discipline and aim for achievement beyond expectation — were the most heavily involved in the stock market. Extraversion, which implies having a high level of engagement with the outside world, came next, followed by agreeableness, the tendency to want to be in harmony with others. Participants who exhibited strong neuroticism, the tendency toward negative emotions, came next, while those who showed openness — the appreciation of unusual ideas and new experiences — came, surprisingly, last.

“While personality types are obviously not the only variables that influence stock market behavior, they clearly do have an impact and they are an important variable to consider,” Rizvi said.

In an emerging economy like India, where higher incomes are leading to greater involvement in the stock market, this type of insight into the way people invest is valuable, Rizvi said. However, financial advisors everywhere would be well-served by understanding their clients’ personality types, even if these are innate and cannot be changed, because this will give them one more valuable tool in constructing a portfolio, she said.

At a time when markets are still recovering and managing portfolios in a fragile, post-recession era is still a challenge, the client-advisor relationship is extremely important, Rizvi said, and it’s imperative for advisors to understand their clients as thoroughly as possible and be on the same page as they are.

To that end, advisors who haven’t already done so would do well to give their clients a personality trait test “because at the end of the day, the kind of portfolio they construct for their client should be matched with the client’s expectations,” Rizvi said.

—Read Stock Price Path Drives Investing Decisions: Behavioral Finance Study on ThinkAdvisor.com.

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