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Wealth and Investment Management THE PSYCHOLOGY OF SUITABILITY Greg B Davies, PhD Head of Behavioural and Quantitative Investment Philosophy www.investmentphilosophy.net @GregBDavies
2 22 There are many facets to your financial personality. There are many ways to manage money. Our Investment Philosophy combines the emotional and scientific dimensions of investing and guides you to a personalised portfolio... One which matches both your financial personality and investment objectives. There are many facets to your financial personality. There are many ways to manage money. Our Investment Philosophy combines the emotional and scientific dimensions of investing and guides you to a personalised portfolio... One which matches both your financial personality and investment objectives. Defining the Barclays unique Investment Philosophy
3 How do we determine the best suitable portfolio? Additional Preferences -Other personality dimensions -Investment views -Financial planning -Client views (if any; eg, Investment restrictions) 2. Risk Capacity (able to take) 1. Risk Attitude (willing to take) -Risk Tolerance -Market Engagement (Downside protection) -Composure (Liquidity, Smoothing) -Balance Sheet of Wealth (Assets and Liabilities) -Income or Expenditure (future expected flows) -Expenditure buffer and/or investment liquidity 4. Knowledge and Experience -Currency considerations -Tax situation -Additional liquidity requirements -Additional income requirements -Planned withdrawals 3. Portfolio Considerations
4 4 Total Wealth Review Opportunistic Investments Emotional and consumption holdings Long-term diversified investment High conviction aspirational assets Investment Portfolio Less Risk/Return Efficient More Risk/Return Efficient Less Risk/Return Efficient Personal Holdings
5 5 Defining the Investment Portfolio
6 6 Know thyself - Financial Personality Assessment Traditional Approach Barclays Wealth Behavioural Approach HIGH LOW COMPOSURE MARKET ENGAGEMENT LOW Risk Attitude HIGH PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION BELIEF IN SKILL LOW HIGH Decision Style HIGH RISK TOLERANCE Risk Tolerance
7 7 Financial framing – instability of risk preferences Alternative A Recover $2,000 Alternative B 1/3 chance $6,000 recovered 2/3 nothing recovered 92% go for A Alternative X Lose $4,000 Alternative Y 1/3 chance nothing lost 2/3 chance $6,000 lost 67% go for X Would you choose A or B? Source: Wang, 1996 Imagine you bought $6,000 worth of stock from a now bankrupt company There are two alternatives to recover money… Would you choose X or Y?
8 8 Implementing the Allocation Through the FPA Moderate Risk Tolerance CLIENT A CLIENT B Risk Attitudes Decision Style COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION
9 Sell date, quarterly If you bought in 1975 and sold in 1995, your average annual return would have been 12% MSCI World Equity Annualised Returns <-5% -5% to 0% 0 to 5% 5 to 10% 10 to 15% >15% Buy date, quarterly Past performance is not a reliable indicator of future results Source: MSCI World Index, 1970 - August 2011, Barclays Wealth
10 Zone of Anxiety Sell date, quarterly Buy date, quarterly <-5% -5% to 0% 0 to 5% 5 to 10% 10 to 15% >15% No nominal losses over any holding period of 12 years or more MSCI World Equity Annualised Returns Past performance is not a reliable indicator of future results Source: MSCI World Index, 1970 - August 2011, Barclays Wealth
11 Implementing the Allocation Through the FPA Moderate Risk Tolerance CLIENT A CLIENT B Risk Attitudes Decision Style COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION COMPOSURE BELIEF IN SKILL RISK TOLERANCE MARKET ENGAGEMENT PERCEIVED FINANCIAL EXPERTISE DESIRE FOR DELEGATION ? ?
12 Personality affects our response to the Zone of Anxiety I buy and sell investments more than I should Source: Barclays Wealth Insights Volume 13 Mean Personality Scores 2 3 4 DisagreeAgree Risk Tolerance Composure
13 Total Return (buy and hold strategy) † Source: Study commissioned by Barclays Wealth at Cass Business School, Clare & Motson (2010) Do UK retail investors buy at the top and sell at the bottom?; UK equity funds from 1992 to 2009 recorded by the Investment Management Association Investor Return (actual investor returns) The Behaviour Gap = 1.2% per year † minus Total Return $430,000 Investor Return$360,000 Behaviour Gap$ 70,000 $100,000 compounded over 24 years… The Behaviour Gap - 16%
14 Practical solutions for investors A and B Investor A has: COMPOSURE MARKET ENGAGEMENT BELIEF IN SKILL Investor B has: COMPOSURE MARKET ENGAGEMENT BELIEF IN SKILL Liquidity Use lower liquidity products to enhance return Smoothing No requirement to smooth the investment journey Liquidity Keep portfolio liquidity high Smoothing Benefit from smoothing the investment journey Downside Defence Protect portfolio against worst case losses Active Management More passively managed products Downside Defence Don’t pay for insurance against worst case losses Active Management More actively managed products 14
Wealth and Investment Management Contact Details Greg B Davies, PhD Behavioural and Quantitative Investment Philosophy firstname.lastname@example.org www.investmentphilosophy.net @GregBDavies www.investmentphilosophy.net
17 Disclaimer This document has been issued and approved by Barclays Bank PLC. Although information in this document has been obtained from sources believed to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This document does not constitute a prospectus, offer, invitation or solicitation to buy or sell securities and is not intended to provide the sole basis for any evaluation of the securities or any other instrument, which may be discussed in it. All estimates and opinions included in this document constitute our judgement as of the date of the document and may be subject to change without notice. This document is not a personal recommendation and you should consider whether you can rely upon any opinion or statement contained in this document without seeking further advice tailored for your own circumstances. This document is confidential and is being submitted to selected recipients only. It may not be reproduced or disclosed (in whole or in part) to any other person without our prior written permission. Law or regulation in certain countries may restrict the manner of distribution of this document and persons who come into possession of this document are required to inform themselves of and observe such restrictions. We or our affiliates may have acted upon or have made use of material in this document prior to its publication. You should seek advice concerning any impact this investment may have on your personal tax position from your own tax adviser. Barclays offers wealth and investment management products and services to its clients through Barclays Bank PLC and its subsidiary companies. Barclays Bank PLC is registered in England and authorised and regulated by the Financial Services Authority. Registered number is 1026167 and its registered office is 1 Churchill Place, London E14 5HP. © Barclays Bank PLC 2012. All rights reserved. Issued for companies including Barclays Bank PLC (Reg. No. 1026167), Barclays Stockbrokers Limited (Reg. No. 1986161), a member of the London Stock Exchange and PLUS, Barclays Share dealing (Reg. No. 2092410), Barclays Bank Trust Company Limited (Reg. No. 920880) and Gerrard Investment Management Limited (Reg No. 2752982), a member of the London Stock Exchange. All of these companies are registered in England and have their registered office at: 1 Churchill Place, London E14 5HP. All of these firms are authorised and regulated by the Financial Services Authority.
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