It seems wealthy investors aren’t all that different from their non-wealthy peers after all. They simply have more money with which to make similar irrational short-term decisions. There is no monopoly on behavioural biases, as we all succumb to human nature at times.
A 2011 Barclays Wealth Insight article considered the differences in investment style between the wealthy and non-wealthy, finding that despite their wealth, 41% of high-net-worth individuals worldwide wish they had more self-control over their financial behaviour. This global survey comprehensively covered the behavioural traits of 2 000 high-net-worth investors across 20 countries, including self-imposed rules and strategies put in place to constrain their investor emotion. These behaviours remain as relevant today. According to American journalist Dave Lindorff, writing in financial-planning.com, a fair proportion of the wealthy allow their emotions to drive their investment decisions no differently from ordinary investors: they trade too much, even though they know they shouldn’t, and like many ordinary investors, they try – but often fail – to discipline themselves in their investing. Approximately 15% to 32% of wealthy investors believed that frequent trading is necessary to earn high returns – notwithstanding that 46% admitted their approach was emotional. ‘Emotional trading can cost an investor about 20% in returns over a decade. Those who use strategies to prevent themselves from over-trading are on average 12% wealthier than those who do not,’ Lindorff wrote. Global behaviours vary, with investors in Asia having a greater desire for financial discipline than their counterparts in Spain, Australia, the US or South Africa.
Another behaviour revealed was that the wealthier – as well as older – one gets, the less one feels the need for financial discipline. This is despite the report’s finding that those who want self-control are less likely to be satisfied with their financial situation. One saving grace was that those with inherited wealth and those with an increasing level of wealth were most likely to rely on others and to delegate financial decisions.
As one commentator remarked: ‘Wealthy investors need more discipline (and they know it). The only difference between wealthy investors and ordinary investors is that wealthy investors have more money.’
Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning
