Despite their wealth, 41% of high net worth individuals (HNWIs) wish they had more self-control over their financial behaviour, says the latest report in the Barclays Wealth Insights series. Interestingly, the report indicates that a need for increased financial discipline is likely to be felt most by those at the wealthiest end of the scale (£10m+), where 45% of respondents wish they had more self-control. This is despite the report showing that those who want self-control are less likely to be satisfied with their financial situation.
The report, Risk and Rules: The Role of Control in Financial Decision Making, is based on a global survey of more than 2,000 HNWIs, and provides an in-depth examination of wealthy investors from a behavioural finance perspective. It considers the different financial personality traits that exist amongst wealthy investors and the different self-imposed rules and strategies that they put in place to deal with these traits. It shows that “emotional” trading can cost investors up to 20% in returns over a ten-year period, and the report shows that those who employ high strategy usage have on average 12% more wealth than those who do not use rules.
Globally, respondents in Asia-Pacific have the greatest desire for more financial discipline, particularly in Taiwan and Hong Kong. In contrast, developed markets show less of a desire for self-control over financial behaviour, as illustrated by respondents in Spain, Australia and the US.
In the Middle East, HNWIs show complex behaviour towards investing and financial decision making. In the Kingdom of Saudi Arabia, HNWIs revealed a tendency to purchase illiquid assets to avoid the urge to sell investments when markets fall – 90% of respondents report this. Saudi HNWIs also prefer to use rules and guidelines to help them make better financial decisions, with 96% of respondents saying that they use rules in financial decision making.
On a regional level, Saudi HNWIs are inclined to set financial deadlines (96%) and have a high tendency to delegate financial decisions to others (90%).
In the UAE, there is also a willingness to delegate financial decisions (82%). Respondents in the UAE also favour setting financial deadlines for themselves (96%) and over three quarters (76%) think that buying and selling often will enable them to do well in the financial markets.
In Qatar, the report shows that respondents are by far the most likely to delegate financial decisions (98%). They also favour active portfolio management to achieve good results in the financial markets, and prefer to strategically time markets as opposed to adopting ‘buy and hold’ strategies. 42% of Qatari HNWIs also say that they prefer to deal swiftly with bad investments and protect themselves from the downside.
Greg Davies, Head of Behavioural Finance at Barclays Wealth says: “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. 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.”
Soha Nashaat, CEO of Barclays Wealth, Middle East and North Africa says: “This report provides an in-depth study into the financial personalities of wealthy investors in the Middle East and gives a fascinating insight into their behaviour. When it comes to financial discipline, there is a desire for greater control when compared with other markets. These results present an interesting challenge for the wealth management industry in the Middle East. Clearly, more needs to be done to help clients understand their financial personality and the benefits of using financial self-control strategies.”
Emotional trading and lost returns
In order to understand investment behaviour and the pitfalls that investors may be prone to, 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 us to buy high and to sell low, which can cost investors nearly 20% in lost returns over a ten-year period. Limitations of self-control lead to what the report identifies as the trading paradox. Globally, a third of those polled (32%) say that trading frequently is necessary to get a high return, however these respondents are over three times more likely to believe that they trade too much. In total, almost half (46%) of respondents who believe one has to trade often to do well think that emotions force them to do this.
This can potentially lead to investors becoming 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 loss prevention focus.
The use of rules and strategies in financial decision making are seen as hugely effective by wealthy respondents. They 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 one with the lowest strategy usage, the report reveals a 13% boost in financial satisfaction and a 12% boost in wealth for investors frequently using strategies.
The report shows that investors use many types of financial strategies to control their decision making processes, 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 your options (64%) are less popular choices, although both those with inherited wealth and 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 multiple approaches of; involving others, being more structured and/or removing temptation.
Greg Davies continues: “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. 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.
“This can only happen if we give something up, such as our flexibility to respond to market movements with knee-jerk reactions, or it may mean sacrificing a small amount of the performance of the “rational” portfolio in order to ensure that we have a portfolio with which we’re emotionally comfortable in the short term.”
The Zen of Ageing
The report also shows how a desire for greater financial discipline declines markedly with age, from over half (53%) of those aged 45 and under wanting more control over their financial behaviour, to just a quarter (26%) among investors over 65. This in turn results in less need for the use of strategies. This is also associated with a decrease in stress and an increase in financial satisfaction.
Younger respondents also show a habit of deliberately avoiding information about how the market or their portfolio is performing – 82% of those aged 45 and under do this, compared to just 68% of those aged 65 and above.