This groundbreaking book shows how to invest wisely by managing your behavior, and not just your money. Step by step, Michael Pompian (a leading authority in the practical application of Behavioral Finance concepts to wealth management) helps you plan a strategy targeted to your personality. The book includes a test for determining your investment type and offers strategies you can put into use when investing. It also includes a brief history of the stock market, and easy-to-comprehend information about stocks and investing to help you lay a solid foundation for your investment decisions.
Behavioral Finance and Investor Types is divided into two parts. Test Your Type, gives an overview of Behavioral Finance as well as the elements that come into play when figuring out BIT, like active or passive traits, risk tolerance, and biases. The book includes a quiz to help you discover what category you are in. Plan and Act, contains the traits common to your type; an analysis of the biases associated with your type; and strategies and solutions that compliment and capitalize on your BIT.
- Offers a practical guide to an investing strategy that fits both your financial situation and your personality type
- Includes a test for determining your tolerance for risk and other traits that will determine your investment type
- Written by the Director of the Private Wealth Practice for Hammond Associates - an investment consulting firm serving institutional and private wealth clients
Behavioral Finance and Investor Types offers investors a better sense of what drives them and what puts on their breaks. By using the information found here, you'll quickly become savvy about the world of investing because you'll come to understand your place in it.
Foreword xi
Preface xiii
Acknowledgments xxi
PART ONE Introduction to Behavioral Finance 1
CHAPTER 1 Why Reaching Financial Goals Is Difficult 3
Nonfinancial Examples of Self-Defeating Behavior 4
Financial Examples of Self-Defeating Behavior 8
Summary 11
Notes 12
CHAPTER 2 Overview of Behavioral Finance 13
Behavioral Finance: Micro versus Macro 14
Standard Finance versus Behavioral Finance 15
The Role of Behavioral Finance with Private Clients 22
Practical Applications 22
Notes 24
CHAPTER 3 The Building Blocks: Behavioral Biases 25
Cognitive Biases 27
Emotional Biases 38
Summary 43
Notes 44
PART TWO Personality Theory 45
CHAPTER 4 Introduction to Personality Theory 47
History of Personality Theory 48
Four Main Personality Theories 50
Notes 65
CHAPTER 5 The History of Personality Testing 67
Types of Personality Tests 67
Summary 77
Notes 77
CHAPTER 6 The Behavioral Investor Type Framework 79
Reviewing the Original Process 81
The Behavioral Alpha Process: A Top-Down Approach 81
Updates to the Previous Model 85
Updated BIT Theory and Application 87
Summary 89
CHAPTER 7 Behavioral Investor Type Diagnostic Testing 91
Step 1: BIT Orientation Quiz 92
Step 2: Bias Identification Quiz 94
Summary 100
PART THREE Explanation of the Behavioral Investor Types 101
CHAPTER 8 The Preserver 103
Upside/Downside Analysis 104
Bias Analysis 105
Other Biases 107
Advice for Preservers 109
CHAPTER 9 The Follower 111
Upside/Downside Analysis 112
Bias Analysis 113
Other Biases 117
Advice for Followers 119
CHAPTER 10 The Independent 121
Upside/Downside Analysis 122
Bias Analysis 123
Advice for Independents 133
CHAPTER 11 The Accumulator 135
Upside/Downside Analysis 136
Bias Analysis 137
Other Biases 141
Advice for Accumulators 144
PART FOUR Plan and Act 147
CHAPTER 12 Capital Markets and Asset Classes 149
Overview of Asset Classes 150
Publicly Traded Equity Investments (Stocks) 154
Fixed Income Investments (Bonds) 163
Hedge Funds 172
Real Assets 176
Simple Portfolio Construction 180
Summary 182
Notes 182
CHAPTER 13 What Is Asset Allocation? 183
The Importance of Assumptions 185
The Importance of Strategic Asset Allocation 186
Considerations for Individual Investors 188
Why Asset Allocation Is So Important 197
Summary 200
Notes 200
CHAPTER 14 Financial Planning: A Crucial Step 201
What Is Financial Planning? 202
Working with a Financial Planner 203
What Is a Certified Financial Planner? 205
Who Can Provide Financial Planning Services? 209
Summary 212
Notes 213
CHAPTER 15 Investment Advice for Each Behavioral Investor Type 215
Foundations of Best Practical Allocation 216
Guidelines for Determining When to Moderate and When to Adapt 217
Best Practical Allocation for Preservers 219
Best Practical Allocation for Followers 222
Best Practical Allocation for Independents 224
Best Practical Allocation for Accumulators 227
Summary 229
Note 230
Index 231
