Make no mistake about it, your personality has a major influence on your behavior as an investor. That's among the key findings of a survey of investors released in November 2004 by Merrill Lynch Investment Managers. The nationwide telephone poll examined the investment mistakes of 1,000 investors and their related attitudes, beliefs and behaviors.

"Our survey underscores one of the fundamental precepts of professional money management: Keep your emotions out of your portfolio," said Robert C. Doll, president and chief investment officer of Merrill Lynch. "In most human endeavors, individual psychology affects behavior and, ultimately, results. Anyone who has ever gone on a diet or started a workout regimen knows that. Investing is no different. Whether you're trying to shrink your waistline or grow your nest egg, discipline and self-awareness go a long way."

The poll was conducted between July 19 and August 9, 2004, by the research firm of Mathew Greenwald & Associates Inc. Participants had to be solely or jointly responsible for financial and investment decisions for their household, and have at least $75,000 in investable assets and an annual household income of at least $75,000 (retirees did not have to meet this requirement). The margin of error (at the 95 percent confidence level) for the 1,000 investors surveyed is plus or minus 3.0 percentage points.

He Who Hesitates Loses Ground

Investors surveyed said that their biggest—and most painful—mistake was waiting too long to start investing.

Of the investors surveyed, 46 percent said they waited too long to invest. And of those, 25 percent said doing so was their most painful mistake.

Asked about major personal regrets, 28 percent of investors wished they had started investing earlier. That compares with 15 percent who wish they had worked harder in school and 9 percent who wished they had been more ambitious in their careers.

The second most common mistake investors cited was "holding a losing investment so long that you ended up losing a significant amount of money." Forty-one percent of investors said they had made that mistake—and 24 percent said it was their most painful mistake.

The next most common mistakes cited were "not putting enough money into your investments" and "waiting too long to sell a winning investment," both of which were mentioned by 36 percent of investors.

Investors and Advisors Have Different Takes on Biggest Mistakes

Companion Merrill Lynch research among professional financial advisors found a difference of opinion on investor mistakes.

Advisors believe failure to observe basic investing fundamentals like asset allocation or rebalancing are the biggest mistakes their clients make, but these sorts of long-term, big-picture factors are well down investors' list.

"Investors and advisors alike agree that waiting too long to invest and not investing enough are critical mistakes," Doll said, "but beyond those, investors tend to focus on the 'glamorous' mistakes like riding winners down, holding onto losers, buying on a tip or putting too much money in a single investment."

According to study director Dr. Brian Perlman, ChFC, CFO of Greenwald & Associates and a psychologist, "Too many investors focus on fighting the battle but not winning the war. Everyone makes mistakes. What many investors don't understand is the critical role careful planning and professional money management can have in preventing those mistakes from derailing their future financial security."

What, Me Worry?

Mistakes notwithstanding, investors generally believe they are doing a pretty good job.

Eighty-eight percent of investors surveyed describe themselves as very or fairly successful, 86 percent believe they will have a financially secure retirement, and 82 percent say they stick with a consistent investment strategy even when the stock market is volatile.

But there are some troubling counter-indications: Almost one-third (30 percent) of all investors have no financial plan and while nearly 60 percent of investors say they are very good at home or car maintenance, only 29 percent say they are very good at managing their investments.

In addition, when asked the reasons for the mistakes they make, 64 percent said "mistakes just happen," suggesting they believe investing mistakes result from random events rather than poor planning.

The Four Faces of Investing

Analysis done by Merrill Lynch Investment Managers and Mathew Greenwald indicated distinct investing personalities.

"Our data analysis reveals four distinct investor personalities," said Greenwald's Perlman. "Each personality has a profound effect on the kind and frequency of mistakes an investor makes."

The investor personality types identified by the research are

1. Measured
2. Reluctant
3. Competitive
4. Unprepared

Of the 1,000 investors surveyed, 32 percent were identified as measured, 26 percent as reluctant, 17 percent as competitive and 11 percent as unprepared; 14 percent did not clearly fall into a category. Profiles of the four types follow.

Measured investors (32 percent): Secure in their financial situation and confident they will have a comfortable retirement, they've achieved their success because they started investing early in life and invest and rebalance regularly. As a rule, these investors do not try to beat the market or over-allocate to a single investment. Measured investors are the least likely to say they waited too long to start investing or have not invested enough. They are also least likely to be plagued by the emotions that commonly cause investment mistakes: fear (14 percent) and anxiety (13 percent).

Mistakes made: Even the most methodical and even-keeled investors make mistakes. Measured investors' dedication to their investments often makes it difficult for them to let go of losing investments. This was the most common mistake cited by measured investors (41 percent) and nearly one-third of them cited this as the most painful mistake they'd ever made.

Reluctant investors (26 percent): These investors do not particularly enjoy investing, preferring to spend as little time as possible managing their investments (92 percent stated this, versus just 27 percent of the measured investors and 35 percent of the competitive investors). Still, reluctant investors say they are happy in their current situation and believe they will have a secure retirement. Reluctant investors have some notable strengths. Only 32 percent of them said they have held losing investments too long and only 25 percent of them said they have over-allocated into one investment. Not surprisingly, reluctant investors are the most likely to have a financial advisor at 63 percent.

Mistakes made: Seventy percent of reluctant investors said they waited too long to start investing and 41 percent of them identified this as their most painful mistake.

Competitive investors (17 percent): Competitive investors enjoy investing, try to beat the stock market, and say they are both happy with their current financial situation and confident in the future. After measured investors, competitive investors are the most likely to have started investing early, to put enough money into their investments, and to invest regularly. This group likes to invest as much as possible and regularly rebalances (only 12 percent have gone more than 18 months without rebalancing). Overall, competitive investors demonstrate high knowledge levels when it comes to investing.

Mistakes made: Forty-six percent of competitive investors have a hard time letting go of losing investments. Thirty-nine percent said they had put too much of their portfolio to one stock or investment. Not surprisingly, competitive investors also tend to chase hot stocks. Competitive investors are most likely to be overconfident (39 percent) and greedy (34 percent), but they are least likely to feel apathy (18 percent) when it comes to investing.

Unprepared investors (11 percent): Unprepared investors are not happy with their current financial situation. They are the most likely to lack confidence (47 percent) and be fearful (41 percent) or anxious (36 percent) about investing. In general, they have lower knowledge levels on financial topics and express the deepest regret about not investing sooner (57 percent see this as a major regret). They do not feel they will have a secure retirement—with reason.

Mistakes made: Unprepared investors are the most likely to say they waited too long to start investing (75 percent)—which they most commonly cite as their most painful mistake—and they are the most likely to say they have not put enough money into their investments (60 percent). They are very likely to hold on to losing investments too long (56 percent), allocate too much of their portfolio to one stock (45 percent) or chase a "hot stock." They are the least likely to rebalance their portfolios. While a smaller group among the relatively affluent sample in this survey, they may well be a much larger proportion of the general population.

Professional Advice Is Critical

Survey data document the value of professional advice. Investors who use advisors express a higher degree of satisfaction and success. Specifically, investors who use advisors…

• Are more likely to have a financial plan (82 percent versus 51 percent of unadvised investors)
• Are more satisfied with their financial situation (78 percent versus 67 percent)
• Are more than 50 percent more likely (34 percent versus 22 percent) to say they're doing a very good job managing their investments
• Have a better mix of investments (81 percent describe their mix of investments as good or better, versus 68 percent of unadvised investors)
• Are less likely to go more than 18 months without rebalancing (13 percent versus 20 percent)

Of the investors surveyed, 60 percent said they have a primary financial advisor. Men are significantly less likely than women to say they have a primary investment advisor—50 percent of male investors say they have a primary financial advisor versus 70 percent of women.

What's an Advisor or Investor to Do?

The first step in eliminating or reducing investing mistakes is for investors to get a better understanding of their investing personality. To do that, Merrill Lynch Investment Managers has created an informational Web site for investors: www.hindsight2insight.com. The site includes a brief, specially developed quiz that allows investors to determine their investing profile. In addition, the site includes survey results, information on the most common investment mistakes and what to do about them, as well as information on how to work with a qualified financial advisor.

Merrill Lynch Investment Managers has created a companion program to help financial advisors work with their clients. Dubbed Hindsight2Insight(sm), the program includes a client-approved presentation and brochure highlighting the survey results, the investor personality types, and the impact of, as well as solutions for, the most common mistakes.