Larry Berman on investment personalities
My Fall 2017 Investor’s Guide to Thriving tour features “What’s Your Investor Personality?” – a fascinating talk about the behavioural science of successful (and not so successful) investing. I will lead the audience through an exercise to identify what type of investor they are of the four key personality profiles of investors. I’ll examine the strengths and weaknesses of each profile, and show you how to use ETFs to build a more successful investment strategy for your personality type.
Over the past two weeks, we considered the accumulator (or growth investor) and the Preserver (Risk Adverse). This week we are focused on the investor type called the follower. Followers are passive investors that typically do not have their own ideas about investing and they follow the lead of friends and colleagues—heavily influenced by water-cooler talk at the office and looking for tips at cocktail parties. Followers looking for a tip of the day typically overestimate their risk tolerance. They are so focused on making money on the upside, they rarely consider the risk of a hot tip.
Followers typically understand the idea of investing, are happy to educate themselves, but they typically do not enjoy or have an aptitude for the investment process. When investing without proper financial advice, they tend to ignore diversification and prudent asset allocation. This significantly increases the risk in their portfolios. Some of these investors today might be overweight FAANG stocks or Marijuana stocks.
They tend to have several investor biases like recency, hindsight, framing, cognitive dissonance, and regret. As a follower, you are typically willing to take more risk, but when things start going against you, you cognitive biases start to take over and hurt your investment results. With the benefit of hindsight, you now realize that your portfolio was too concentrated when everything you own moves down together. Advisorshares lunched a FAANG type (New Tech and Media) ETF a few months ago (FNG.N) that is a play on hot stocks. The top holdings are all the stocks that are hot and in the media (the “fast money” names). The top five holdings are about 45 per cent of the weight (AMZN, FB, BABA, GOOG, BIDU). The sensitivity (beta) of this ETF to the broad US market is about 160-200 per cent. That means when it’s up, you are doing very well, and when it’s down, it’s down way more than the market. This is the classic follower type holding and will often lead to regret when things go bad.
If you are a follower, our upcoming Berman’s Call tour (investor’s guide to thriving) will help you learn how to avoid the tip of the day and when and how to incorporate these types of in the news higher risk holdings in to your portfolios without regret aversion and hindsight bias. The key here is to learn about correlation and diversification and it’s impact of return and risk in your portfolio.
You will learn how to identify what type of investor you are and some techniques to improve how to manage your asset allocation so you can preserve and grow your portfolio. The events are free and we ask for a voluntary charitable donation to either Sick Kids Hospital or Baycrest Brain Health research for Alzheimer’s. Visit www.etfcm.com or Bermanscall.com to register.
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