Wealth and Investment Management

THE PSYCHOLOGY OF SUITABILITY

Greg B Davies, PhDHead of Behavioural and Quantitative Investment Philosophy

www.investmentphilosophy.net@GregBDavies

222

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

44

Total Wealth Review

Opportunistic

Investments

Emotional and consumption

holdings

Long-term diversified investment

High conviction aspirational

assets

InvestmentPortfolio

LessRisk/Return

Efficient

MoreRisk/Return

Efficient

LessRisk/Return

Efficient

PersonalHoldings

55

Defining the Investment Portfolio

66

Know thyself - Financial Personality Assessment

Traditional ApproachBarclays Wealth Behavioural

Approach

HIGH

LOW

CO

MPO

SU

RE

MA

RK

ET

EN

GA

GEM

EN

TLOW LOW LOW

Risk AttitudeHIGH HIGH

PER

CEIV

ED

FIN

AN

CIA

L EX

PER

TIS

E

DESIR

E F

OR

D

ELE

GA

TIO

N

BELI

EF

IN

SK

ILL

LOW LOW LOW

HIGH HIGH HIGH

Decision StyleHIGH

RIS

K

TO

LER

AN

CE

Risk Tolerance

77

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?

88

Implementing the Allocation Through the FPAModerate Risk

Tolerance

CLIE

NT A

CLIE

NT B

Risk Attitudes Decision Style

CO

MPO

SU

RE

BELI

EF

IN S

KIL

L

RIS

K T

OLE

RA

NC

E

MA

RK

ET E

NG

AG

EM

EN

T

PER

CEIV

ED

FIN

AN

CIA

L EX

PER

TIS

E

DES

IRE F

OR

DELE

GA

TIO

N

CO

MPO

SU

RE

BELI

EF

IN S

KIL

L

RIS

K T

OLE

RA

NC

E

MA

RK

ET E

NG

AG

EM

EN

T

PER

CEIV

ED

FIN

AN

CIA

L EX

PER

TIS

E

DES

IRE F

OR

DELE

GA

TIO

N

9

Sell date,quarterly

7070

75

75

80

80

85

85

90

90

95

95

00

00

05

05

10

10

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

7070

75

75

80

80

85

85

90

90

95

95

00

00

05

05

10

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

1111

Implementing the Allocation Through the FPAModerate Risk

Tolerance

CLIE

NT A

CLIE

NT B

Risk Attitudes Decision Style

CO

MPO

SU

RE

BELI

EF

IN S

KIL

L

RIS

K T

OLE

RA

NC

E

MA

RK

ET E

NG

AG

EM

EN

T

PER

CEIV

ED

FIN

AN

CIA

L EX

PER

TIS

E

DES

IRE F

OR

DELE

GA

TIO

N

CO

MPO

SU

RE

BELI

EF

IN S

KIL

L

RIS

K T

OLE

RA

NC

E

MA

RK

ET E

NG

AG

EM

EN

T

PER

CEIV

ED

FIN

AN

CIA

L EX

PER

TIS

E

DES

IRE F

OR

DELE

GA

TIO

N

?

?

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

Pers

on

ality

Score

s

2

3

4

Disagree Agree

Risk Tolerance Composure

13

0

50

100

150

200

250

300

350

400

450

500

Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11

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$360,000Behaviour Gap $ 70,000

$100,000 compounded over 24 years…

The Behaviour Gap

- 16%

14

Practical solutions for investors A and B

Investo

r A

has:

CO

MPO

SU

RE

MA

RK

ET E

NG

AG

EM

EN

T

BELI

EF

IN S

KIL

L

Investo

r B

has:

CO

MPO

SU

RE

MA

RK

ET E

NG

AG

EM

EN

T

BELI

EF

IN S

KIL

L

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

1515

Wealth and Investment Management

Contact Details

Greg B Davies, PhDBehavioural and Quantitative Investment

Philosophy

greg.davies2@barclays.comwww.investmentphilosophy.net

@GregBDavies

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.