Patrick Murphy, a specialist with Barclays Capital, watches graphs on his monitors from his booth's position on the floor of the New York Stock Exchange in New York, Tuesday, Feb. 22, 2011.Kathy Willens/The Associated Press
Wealthy individuals who make investment decisions based on emotion rather than strategy can lose up to 20 per cent of their returns over a 10-year period, a Barclays Wealth study on Monday showed.
Following a pre-determined investment strategy can help investors avoid costly mistakes like buying high and selling low when markets are in crisis, the report said.
"We are suggesting to people not to trade so much because it is not in their interest ... You should only change strategy in periods of quiet reflection. (Investment strategy) is allowed to evolve over time but you have to do it in a thoughtful way," Greg Davies, head of behavioural finance at Barclays Wealth, said.
That discipline pays dividends, Mr. Davies said, pointing out that those who stuck to a structured investment strategy are on average 12 per cent richer than those who do not.
Mr. Davies and his team of behavioural finance specialists track and analyze investor reaction to market dynamics and study how their emotions impact investment decisions.
Their study - Risk and Rules: The Role of Control in Financial Decision Making - has highlighted that many of the world's rich wish they had greater willpower to maintain their investment strategies.
Two in five high-net worth individuals said that they wished they traded less and stuck to their investment strategy, with the figure hitting 86 per cent in Taiwan and 70 per cent in Hong Kong.
UK respondents showed much less appetite for investment rules, with just one in three expressing a desire to curb emotional investing, echoing views from respondents based in South African, the United States, Australia and Spain.
"Countries with a long history of economic stability, financial sophistication and development are those which tend to require less discipline and therefore they use rules less than others," said Mr. Davies.
The study polled 400 UK high net worth individuals and more than 2,000 globally.
The survey also revealed that the need for increased financial discipline is felt most by respondents with £10-million ($16.4-million) or more.
Forty-five per cent of respondents in this category said they wish they had more self-control in financial decisions.
The desire for greater financial discipline declines with age; over half of those aged 45 and under want more control over their financial behaviour, but the figure drops to just a quarter of respondents over 65, partly due to "a decrease in stress and an increase in financial satisfaction."
While older investors reject rules, younger ones tend to ignore market developments altogether. Four in five respondents under 45 deliberately avoid information about how the market or their portfolio is performing.