There are some people who would love it if you threw a surprise birthday party for them. They'd enjoy every aspect of it, from the sudden yell of "Surprise!" to being the center of attention to eating cake with a large group of friends.On the other hand, there are people who think that a surprise party in their honor would be the very opposite of enjoyable. They don't like unplanned surprises. They don't want a roomful of people looking at them. And what if the cake wasn't the kind they liked?Same event. Two widely divergent experiences. People with different personalities will look at identical circumstances with completely different perceptions. So, it's not a stretch to say that those same personality differences will play a role in how they make financial decisions—how they perceive risk and reward and how they judge whether or not an investment is good.Recently, a team of researchers from three universities were able to demonstrate a strong correlation between people's personality traits and their behaviors as investors.1 They did this through a survey of 3,325 U.S. investors and were able to confirm their findings by comparing their results with several similar studies done in Europe.According to psychology, each of us has varying degrees of the Big Five personality traits: Extroversion, Agreeableness, Openness, Conscientiousness, and Neuroticism. The researchers found that when it comes to financial decision making, several combinations of these traits had an effect on investing behavior.For example, people with high conscientiousness and extroversion tend to expect a lower probability of a market crash and, as a result, tend to be more willing to make riskier investments.On the other hand, people with high neuroticism perceive the market as much more risky and are more comfortable with less volatile investments that feel "safer.”People with high openness and low neuroticism are open to the idea that the market could go up or down, but feeling this risk is appropriate, are likely to invest in stocks and stock funds.Interestingly, both extraverts and neurotics like to get investing advice from people around them. The first, because comparing strategies is a social interaction. The second, because they have a fear of missing out.Regardless of how you perceive the market, making investment decisions based on over-optimism or dire pessimism can negatively affect your long-term returns.A trusted advisor takes into account your personal risk tolerance, along with your unique financial situation, and goals. And when strong emotions threaten to sway your investing decisions, they can also give you valuable, objective insights to help you progress along a plan with the best chance of attaining your desired outcomes.
Sources:1. http://go.pardot.com/e/91522/ty-shapes-investment-portfolio/94gbpb/2180082786/h/osPVbf4B_LWBn4ZTapVblOPIGj0llXNIhm3H-KeJ6rsDisclosure:The views expressed herein are exclusively those of Efficient Advisors, LLC (‘EA’), and are not meant as investment advice and are subject to change. All charts and graphs are presented for informational and analytical purposes only. No chart or graph is intended to be used as a guide to investing. EA portfolios may contain specific securities that have been mentioned herein. EA makes no claim as to the suitability of these securities. Past performance is not a guarantee of future performance. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.