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Personality as a predictor of investment success
There’s no real mathematical formula for investment success, but there is one common personal trait that bodes well for profitability when combined with a “healthy” dose of fear, a market strategist has pointed out.
Personality as a predictor of investment success
There’s no real mathematical formula for investment success, but there is one common personal trait that bodes well for profitability when combined with a “healthy” dose of fear, a market strategist has pointed out.
Speaking recently on the nestegg podcast, chief market strategist at CMC Markets Michael McCarthy said that while there’s no one-size-fits-all approach to investing, there is one key predictor for investment success that stands out above all others.
“The right investments depend on our own goals, our own needs, our own time frame, our risk appetites and a whole lot of personal characteristics,” he offered.
At the same time, “there are some personality traits that do seem to predict success”, the strategist said.
Drawing on his background as a professional trader, Mr McCarthy said, “One thing that I’ve noticed, and one thing I look for in people who are seeking to become professional traders – and this extends to investing – is that they’re confident.”
“They’ve got the confidence to stand up and try things, because that’s what it takes to learn in markets.”
This marries in with mistakes being “absolutely crucial to the process of becoming a better investor or trader”.
Mr McCarthy said the reality is none of us can predict the future with any certainty.
“It doesn’t matter how intelligent [or] hardworking we are, we can’t predict the future, but can only keep trying to make the best decisions we can based on the information we have,” he outlined.
Conceding that it means we will always be wrong at times, the strategist said that as a result, “it’s not about not being wrong, it’s about making sure when we are wrong that we keep our losses minimised”.
“When people hang on and hope and end up wiping out a substantial part of their portfolio, that can be very damaging to them, because it undermines their confidence in the markets,” he explained.
And while “a little bit of healthy fear about markets is a good thing”, Mr McCarthy said it does cause problems where it undermines confidence.
In his experience, this is more common than new investors may think, and he sees it often with new traders and customers just starting out on their investment journey.
They start trading on what’s known as a demonstration account – one “specifically created for people to practice and learn how to place orders, how to close trades and all of the other aspects of investing”.
“But this practice account has play money in it,” Mr McCarthy continued.
He observed that he often sees people do very well when they’re doing their practice account. However, “when they convert to real money, everything changes”.
“That’s because once we put real money on the line, our emotions start to come into play,” he stated.
“I’m not saying we should ignore emotions, they’re important parts of us and we all have them, of course, but if we make decisions in our investments based purely on emotion, we’re putting ourselves in danger.”
Emotion becomes of particular concern when investors aren’t able to make a transaction because they’re too worried about what might happen.
When this is the case, Mr McCarthy flagged it as the time to start working on the characteristics that underpin the confidence to invest correctly.
This is where qualities like resilience and determination do then come in, with the professional investor considering these traits as “key predictors of success in the markets”.
Like many other skills in life, Mr McCarthy said “investing well is learnt by experience”.
“It’s not something that can be learned from a book.”
“The reason for that is it doesn’t just take our brain power to invest well, we also have to control and understand what our emotions are telling us,” he explained.
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