Self-control is the key to an investor’s life

Financial Times

 “I know I’m gone too far,
Much too far I gone this time,
And I don’t want to think what I’ve done,
I don’t know how to stop”

“No Self Control”
Peter Gabriel, 1980

Self-control is the key to much in life and in investment it is the key to almost everything. Over the past two decades, research bringing the findings of experimental psychology to finance has detailed how far even the most intelligent people go wrong when they invest, because they cannot control their emotions. The field of behavioural finance is fascinating but the issue has always been: can anyone make any money out of it? As inevitable as human errors may be, they do not seem to translate into inevitable gains or losses for particular stocks or bonds. Rather than offering everyone a way forward, behavioural research often reads more like a counsel of despair.

The latest entrant to the field of behaviouralism attempts to correct this. Barclays Wealth this week published a survey of 2,000 very wealthy people the world over, all of whom had at least £1.5m in investable assets. It asked about their self-control and strategies they employed to overcome personal indiscipline. I am not sure how scientific any such survey can be, as it relies on self-assessment, but the results are interesting. The wealthy seem as caught up in the “paradox of trading” as everyone else. In sum, the market is difficult to time and so the more you trade, the less likely you are to make money. The only certainty is that the transaction fees will pile up (so the financial services industry has an interest in encouraging this). Heavy trading is almost always a waste of money – unless you have access to very good information, a lot of leverage and are prepared to do it full-time.

Barclays Wealth found that a third of its wealthy respondents thought that “to do well in the financial markets you have to buy and sell often”, while 40 per cent described themselves as trying to time the market rather than use a “buy and hold” strategy. Despite this, 16 per cent said that they traded too much. These were disproportionately drawn from the camp that thought it necessary to buy and sell often. Trading appears to be troublesomely addictive: people do it too much and cannot stop themselves. Women are less prone to this problem than men, while age also brings greater self-control. So how are over-traders to set about controlling themselves? Barclays cites approvingly the example of Ulysses, who tied himself to a mast to ensure that he did not fall victim to the sirens’ song.

The strategies it details are almost as drastic. They include deliberately limiting your options (by, for example, buying highly illiquid investments). Two-thirds of the very wealthy do this in their financial life, apparently. Some 76 per cent resort to “avoidance” strategies, such as avoiding news about how prices are changing. As with options-limiting strategies, they are less likely to try this in finance than they are in real life. However, 89 per cent try applying strict rules. Examples that Barclays asked about included setting deadlines to overcome procrastination (used by 90 per cent) and using cooling-off periods, such as taking an enforced break of 24 hours after seeing a house before making an offer for it (cooling-off methods were used by 92 per cent). It found that many wealthy individuals dealt with their indiscipline by delegating decisions to others – which does not so much deal with the problem as avoid it altogether. It works only so long as the person you choose turns out to have strong self-control.

All of these are intriguing notions. But it seems to me that the most natural solution is to deliver ourselves from temptation altogether. Amateur traders have a strong tendency to lose money. It is something that none of us – even the wealthiest among us – should try doing at home, unless we make it a full-time occupation.

A better approach, surely, is to invest passively, dripping money into index-tracking products on a regular basis. That way our own self-control is not tested, and we are not even vulnerable to an undisciplined fund manager. Maybe we could be more ambitious and try investing in highly quantitative funds that attempt to take advantage of market inefficiencies. They set out to pick up the money that others lose through indiscipline. But this only makes sense if the fees are low. Away from the rich, it would be best if the investment industry could design products that create no temptation for tinkering or over-trading. If the default option on offer from pension and insurance providers is good, then we can all get on with the more enjoyable things in life. But for that to happen, the investment industry itself needs to show a little more self-discipline.

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