1. Portfolio Management Unit – II Session No. 9 Topic: Investor Characteristics Unit – II Session No. 9 Topic: Investor Characteristics

2. Session Plan Unit - II Briefing Investors characteristics Situational profiling character – (a). Source of Wealth – (b). Measure of Wealth – (c). Stage of Life Summarizing and Q & A

3. Managing Individual Investor Portfolios: – Investor Characteristics, – Investment Policy Statement, and – Asset Allocation. Managing Institutional Investor Portfolios: – Pension Funds, – Foundations and Endowments, – Investment Setting in Life Insurance and Non-Life Insurance Companies, – Investment Setting with Banks and Other Institutional Investors. Text Book: John L. Maginn et al. (2007), Managing Investment Portfolios: A Dynamic Process, John Wiley & Sons, Inc, 3 rd Edition Unit Briefing

4. Investor Characteristics Wide range of personal concerns and preferences that influence the decision-making process. Traditional models of ‘‘rational investor’’ behavior, such factors as – personality, – life experiences, and – personal circumstances. An investment approach that begins with – preferences, and – perceptions of risk

5. Investor Characteristics Classification: Situational Profiling – economic circumstance Psychological Profiling – behavioral patterns and personality characteristics

6. Situational Profiling To categorize individual investors by stage of life or by economic circumstance. Situational profiling runs the risk of oversimplifying complex behavior Used with a measure of caution. Useful first step in considering – investor’s basic philosophy – preferences, – facilitating the discussion of investment risk – anticipating areas of potential concern or – special importance to the investor.

7. Situational Profiling Approaches – Source of wealth – Measure of wealth – Stage of life

8. Situational Profiling Approaches 1. Source of wealth To understand investor’s probable attitude toward risk To know the level of risk tolerance ‘‘Self-made’’ investors may have greater familiarity with risk taking and a higher degree of confidence in their ability to recover from setbacks. They also have a strong sense of personal control over the risks that they assume.

9. Situational Profiling Approaches 2. Measure of wealth The subjective nature of financial well-being Difficult to categorize investors based on portfolio size (net worth) Example: A portfolio that one individual considers large and ample to meet future needs may be insufficient in the eyes of another individual.

10. Situational Profiling Approaches 3. Stage of life In life-stage classifications, investment policy, and particularly risk tolerance, are determined by one’s progress on the journey from – childhood to youth, – adulthood, – maturity, – retirement, and – Death Theoretically, a person’s ability to accept risk should begin at a high level and gradually decline through his lifetime

11. Situational Profiling Phases of individual’s investment policy : 1.Foundation – establishing the base for wealth creation, acquisition of educational degrees and certifications, individual is usually young 2.Accumulation - earnings accelerate as returns, income rises and expenses also rise, purchase of homes, and care and education of children, middle and later years of wealth accumulation 3.Maintenance - retired from daily employment, focuses on maintaining the desired lifestyle and financial security, preserving accumulated wealth begins to increase in importance, while the growth of wealth may begin to decline in importance, Risk tolerance will begin to decline 4.Distribution - accumulated wealth is transferred to other persons. An individual may consider various transfer strategies

12. Summarizing Q & A What are the fundamental factors influencing the investors characters? Why “Self-made” investors may have greater familiarity with risk taking? How an individual differentiate the size of Portfolio to meet his future needs? Why the investors’ ability to accept risk should gradually decline through his life time?