I remember it was the fall of 1987 – I was in university, studying investment analysis and portfolio management, and close to finishing my finance degree. Watching the markets was part of my education, but I had another reason: throughout my teenage years, I had socked away much of the proceeds of my various summer jobs into mutual funds. By the time I was in college, I had a very modest portfolio – although it seemed large at the time.
Then Black Monday happened, October 1987. In a matter of hours, something like 23 per cent of my portfolio was wiped out (at least, on paper). I remember reading the news, talking about it with my college friends and professors, trying to understand the reasons, and more importantly, figuring out what to do next.
It was one of those "fork in the road" moments. I could have sold and licked my wounds. Instead, I took a deep breath and doubled down – in fact, I borrowed from my parents to buy more. Turns out it was the right thing to do as the markets recovered and rallied significantly. Within two years, I was sitting on a very nice gain – enough to pay Mom and Dad back (with interest), and graduate with no debt.
When I look back, I can see the episode taught me a lot about myself: how I view financial crises, how much risk I'm willing to take, how I'm likely to act under financial stress. It also taught me about the critical role behaviour plays in the investment process.
Up until then I was focused on the numbers of finance: securities analysis, accounting, financial projections, statistics, etc. Black Monday changed that. I finally understood fear and greed were the most powerful market forces of all.
It's a lesson I've never forgotten. Since then, I've spent a lot of time reading research on behavioural finance, and backing that reading up with real-life experience with clients. What I've noticed is that there is often a discrepancy between the investor people believe themselves to be, and the investor they really are. Call it a "self-knowledge gap." A lot of investors out there simply don't know themselves.
(I would say this problem is less pronounced among the high-net-worth population. I've noticed part of the reason why the wealthy are financially successful is because most – by no means all – have been able to identify their financial strengths and weaknesses. This helps increase their investment batting average over time.)
I believe every investor needs to understand their "Financial DNA personality." Their typical behaviour patterns, motivations behind financial decisions, emotional strengths and weaknesses, etc. The goal should be to anticipate reactions to specific scenarios (as much as possible), and try to understand what makes themselves "tick," financially speaking.
Some people (including some professionals) scoff at this kind of introspection. They believe the best thing investors can do is take their personalities out of the investment equation – to invest with a purely rational, numbers-only approach.
It's a noble goal, but in my experience, completely impractical. I believe no market is completely rational, and investors are human, not machines. Therefore it's much more important to try to understand our potential blind spots than try to deny they exist. Simply put, the more aware we are, the more informed decisions we're likely to make.
Over the years, I've used (and studied) many systems and profiling tools to increase my understanding of my clients and the emotional factors that play a role in their financial decisions. Of course, no system can ever be 100 per cent perfect or predictive. That said, they can make it a lot easier to understand the deeply rooted tendencies that take over in moments of financial anxiety.
One system we've been using with our ultra-high-net-worth clients is "Financial DNA." It's a profiling system developed by Hugh Massie. Over the past decade, Massie has worked with a number of leading behavioural psychology experts to develop a robust profiling system that is currently used by over 2,000 leading international corporations, many of them Fortune 500 companies.
Financial DNA focuses on an online self-assessment that takes about 15-20 minutes to complete. The assessment generates an individual five-page summary profile, categorized into 10 broad Financial DNA "styles." Each style has specific financial strengths and weaknesses that spell out your "relationship to money," as well as your likely reaction to stresses and events.
Here's a brief run-down on the financial profiles:
Exhibits a strong drive to reach key goals. They are realists and analyzers, and use a rational, objective approach to make important financial decisions.
Tends to take bold, decisive action and make quick, instinctive decisions. They trust their own judgment and often have a contrarian bent to their investment style.
A visionary – he/she can see the big picture and imagine possibilities that others often can't. The influencer places great importance on connections, and seeks to use his/her network to seize opportunities whenever possible.
Outgoing "people connectors" who are naturally enthusiastic and upbeat. They enjoy new opportunities and starting (rather than finishing) new goals.
Focused on team success. They are enthusiastic and easygoing, and tend to seek supportive relationships with experts rather than making financial decisions on their own.
At their best when working closely with trusted friends and experts. Relationship builders tend to value financial stability and make financial decisions based on history and security.
Balanced, discerning and harmonious. They are collective decision makers and value the input and advice of experts. When it comes to managing wealth, they value stability and a "slow and steady" approach.
A blend of all styles. They are pragmatic and thoughtful, and as their name suggests, they are versatile and capable of adapting to changing circumstances. That makes them very capable investors.
These are sharp, insightful people who value precision and technical information when it comes to making decisions. They value discussion and sharing of ideas, and are strongly goal-oriented.
More analytical, thorough and almost "philosophical" in their thinking. They are particularly adept at drawing incisive conclusions from data and research.
Are such profiles perfect? Of course not. But I would say they can be remarkably accurate and insightful. They're easily one of the best ways I've come across of understanding the "soft side" of investing.
Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada (www.tiger21.com/canada). He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)'. (www.stennerinvestmentpartners.com) (Thane.Stenner@RichardsonGMP.com). The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.