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By Tom Madell, Ph.D
Personality characteristics play a very important role in the degree of success most mutual fund investors enjoy through the years.
All investing, to be sure, involves making decisions based on data that is often subject to differing interpretations and which is usually less than complete. (Of course, there are always those who are so sure that it is based on nothing more than luck, or who are so overwhelmed by the prospect of doing a little research and a making a decision that they just do the psychological equivalent of "flipping a coin", or don't invest at all.)
How each person handles the ambiguities involved in making investment decisions probably goes a long way in determining who is relatively successful and who isn't.
When you invest in mutual funds, as opposed to individual stocks, most of the uncertainties with regard to company fundamentals are taken care of for you. A fund manager, or a passive index, picks the actual portfolio for you. Your job becomes that of a gatekeeper, determining when to turn on and off the spigot, and to which fund(s).
When relieved of the responsibility of analyzing company fundamentals, your decisions -- apart from the merits of individual funds themselves -- will be colored largely by your overall level of personal optimism, your concern for short-term issues vs. your ability to postpone such concerns to achieve longer range goals, and perhaps most importantly, to your openness to the possibilities of new ways to achieve your objectives.
Optimism vs. Perceived Risks
In order to be successful as an investor, it is much more helpful to have the characteristic of being optimistic about things in general than it is to be pessimistic. Investing almost always involves a leap of faith, and usually, that leap turns out to be justified over the long run since problems which could lead to negative investment results have a way of resolving themselves for the better.
Many people expose themselves too minimally to what they perceive to be riskier categories of investments out of fear that the worst will happen, and as a result, limit their investment returns by under-weighting or avoiding altogether potentially higher performing investment categories. Or, they tend to abandon their prior choices too quickly for the same reason, perhaps ill-prepared to view any passing shocks as transitory in nature.
Shorter-Term (ST) vs. Longer-Term (LT)
Needs People differ as to whether they view investing as either a way to maneuver their money with utmost regard paid to the immediate future versus as a means of managing money primarily for one's long-term future well being. The ST'ers strive to make a lot of money (or avoid losing money) over a relatively short time period, preferring to believe that the future is largely unknown. The LT'ers appear to be much more able to disregard present performance, being willing to earn even moderate returns but over an extended period (perhaps the rest of their lives), earning that compounds into larger and larger sums down through the years.
Although the former approach is not totally devoid of merit, it is also not totally unlike any other quick profit tactic focusing on big rewards and immediate gratification without the necessity for a sustained commitment. This may work out well for some, usually over a limited period of time, but others will wind up well short of their goals. And even when achieved, a few "big hits" rarely are sufficient to provide both financial and psychological sustenance indefinitely.
When, however, you are more oriented toward the long term, and willing to endure the sacrifices (and work!) necessary, the odds are heavily in your favor that your future comforts and peace of mind will probably be far greater than might have been possible had you invested mainly with a more narrow focus on achieving immediate profits.
How Open Are You to New Input?
For me, the personality characteristic that is most important as to whether or not you will be reasonably successful as an investor is the degree to which you are open to new input. If you are, you will be able to appropriately adjust in the face of new data and your own ever changing experiences.
But how open are most of us to learning from our missteps and from the knowledge afforded to us by others? Unfortunately, the answer is far too little. Many people do not appear to change their investment "personality" over an entire lifetime, never mind far shorter periods of time. (Can you think of a friend, parent, or relative who perhaps fits this description?)
I have found that the investment landscape, while not perpetually changing, shifts enough that the investor needs to be open to new ways of looking at things if they wish to have the most chance of success.
As mutual fund investors, many of us have come to believe that we can manage our investments by ourselves. After all, why else have mutual funds been called the investment vehicle for the masses? Unlike with individual stocks, the thinking goes, anyone can be their own advisor.
But is this assumption correct? Perhaps, but only if one has a firm handle on how one should allocate their assets between such major categories of investments as stocks vs. bonds. (Such allocation assistance is only provided when investing in a tiny handful of funds.) Further, since various categories of stock or bond funds sometimes outperform or underperform other stock or bond categories for a decade or more at a time, it makes it that much more important that any investor be able to recognize which category their fund specializes in and which categories may be among the next leaders.
Perhaps I can offer an explanation for one of the reasons why some people are not fully open and flexible regarding new ideas and strategies.
For anyone who is an autonomous and perhaps a competitive kind of person, it may be difficult to acknowledge and accept the input provided by others.
Most of us would like to believe in the magical notion that we ourselves can do better than most other people, despite the fact that we have usually do not have the time to thoroughly watch over changing developments nor to sensibly confirm our supposed outperformance.
About the Author: Tom Madell, Ph.D. is the author of numerous articles and several books in the areas of psychology, personality, research, and computers. He is the publisher of a free email newsletter called "Mutual Fund Trends and Research" available from his Web site at http://www.funds-newsletter.com. The site also contains numerous articles on mutual fund investing. Recently, his newsletter and site were discussed on the radio show "Off Wall Street" in the Los Angeles area and broadcast around the world on the Internet.