How Your Personality Can Affect Your Portfolio

Can certain personality traits explain investors’ risk tolerance and investment decisions?

A forthcoming paper suggests it might. Specifically, the authors found that two personality traits—neuroticism and openness—significantly affect how investors perceive the economy, financial markets and their likelihood to buy stocks or stock funds, with those who are less neurotic and more open tending to have a higher allocation to equities.

While the authors primarily studied investors in the U.S., they also identified similar patterns among investors in Germany, Australia and China.

The Wall Street Journal spoke with two of the paper’s co-authors, Hongjun Yan, a professor of finance at DePaul University’s Driehaus College of Business, and Cameron Peng, an assistant professor of finance at the London School of Economics, about their findings. Zhengyang Jiang, an associate professor of finance at Northwestern University’s Kellogg School of Management, is the paper’s other co-author.

Here are edited excerpts of the conversation.

WSJ: How can psychology theories help to explain investor behaviour?

YAN: Investors often have very different portfolios. Traditionally, economists focus on risk aversion and market expectations, but in this paper we argue that well-known personality traits—extroversion, agreeableness, openness, conscientiousness and neuroticism—provide a new dimension to explain investors’ choices.

In the Winnie-the-Pooh stories, Tigger is always excited and optimistic while Eeyore is always down and pessimistic. You might expect their investment portfolios to look very different and reflect their overall outlook.

WSJ:How did you study this topic?

PENG: We collaborated with the American Association of Individual Investors, administering a survey to over 3,000 of its members. We collected information on their personality traits, market expectations, and investment decisions. The AAII sample is predominantly wealthy, white, older men. And when they make investment decisions, they are usually quite big, involving hundreds of thousands or even millions of dollars. Their actions can have a real impact on the market.

WSJ:What did you find?

YAN: We found that neuroticism and openness are correlated with investors’ beliefs about the market and their likelihood to buy equities. We were surprised that agreeableness wasn’t important when it comes to investment beliefs or decisions since other researchers have found that agreeableness tends to be correlated with other economic outcomes, like success in negotiating wages.

WSJ: How does neuroticism affect investors’ decisions?

YAN: Someone who is more neurotic has a very different outlook than someone who is not in terms of stock-market expectation. For example, an investor ranking in the middle of the [neurotic] scale might expect an annual stock-market premium of about 6%. But investors at the top of the scale are likely to only expect a 4% stock-market premium, while investors at the bottom of the neuroticism scale are likely to expect an 8% stock-market premium.

PENG: Neuroticism also affected how respondents invested their money in their actual accounts. More neurotic investors were less likely to own equities. Very neurotic investors invested about 56% of their portfolio in equities, while investors who weren’t neurotic invested about 64% of their portfolio in equities.

WSJ:How does openness affect investors’ decisions?

PENG: Investors ranking high for openness were more likely to entertain the possibility of extreme events, like a market crash or a run—really any scenario when the market goes up or down by more than 20%.

Investors who were very open were somewhat more likely to take risks by buying equities. Specifically, investors who were the most open were 3 percentage points more likely to own more equities than investors who weren’t. They had about 62% of their portfolio in equities, while investors who were less open had about 59% of their portfolio in equities.

WSJ: What did you find when you looked at data from other countries?

YAN: We find that neuroticism and openness affect market perceptions and decisions fairly consistently across different data sets. That’s quite remarkable considering the culture and investing environment in each country is very different.

WSJ:What are the study’s implications?

YAN: Personality traits may shape investors’ decisions in ways that many economists have yet to seriously consider. Our research, for instance, also suggests more extroverted and more neurotic investors’ investment choices could be highly influenced by social interactions, or what their friends or colleagues are doing. That insight goes beyond economists’ traditional framework, which focuses on risk tolerance and market expectations, and could help researchers better explain investor behaviour.

PENG: Large asset-management firms or financial planners could spend time getting to know their clients’ personalities and use those insights when they make investment recommendations. Maybe they could encourage investors who tend to be neurotic to be a little less pessimistic.

Apple and its suppliers aim to build more than 50 million iPhones in India annually within the next two to three years, with additional tens of millions of units planned after that, according to people involved.

If the plans are achieved, India would account for a quarter of global iPhone production and take further share toward the end of the decade. China will remain the largest iPhone producer.

Apple has gradually boosted its reliance on India in recent years despite challenges including rickety infrastructure and restrictive labor rules that often make doing business harder than in China. Among other issues, labor unions retain clout even in business-friendly states and are pushing back on an effort by companies to get permission for 12-hour work days, which Apple suppliers find helpful during crunch periods.

Apple and its suppliers, led by Taiwan-based Foxconn Technology Group, generally believe the initial push into India has gone well and are laying the groundwork for a bigger expansion, say people involved in the supply chain.

Apple is emblematic of a move among companies worried about over dependence on China to move parts of their supply chains elsewhere, most often to Southeast Asia and South Asia. Diplomatic efforts by the U.S. and its allies to block Beijing’s access to advanced technology and strengthen ties with New Delhi have accelerated the trend.

The first phase of a Foxconn plant under construction in the southern state of Karnataka is expected to start operating in April, and the plant aims to make 20 million mobile handsets annually, mainly iPhones, within the next two to three years, said people with direct knowledge of the construction plans.

A further iPhone-producing mega plant is on Foxconn’s drawing board with capacity similar to the one in Karnataka, although the plans are still in a nascent stage, the people said.

Apple has also chosen India as its site for a manufacturing stage for lower-end iPhones to be sold in 2025. In this stage, known as new product introduction, Apple’s teams work with contractors in translating product blueprints and prototypes into a detailed manufacturing plan. Until now, that work was done only in China.

Combined with plans for expanded production at an existing Foxconn plant near Chennai and at another existing plant recently bought by Indian conglomerate Tata, these developments signify that Apple intends to have the capacity to make at least 50 million to 60 million iPhones in India annually within two to three years, said people involved in the planning.

Annual capacity could grow by tens of millions of units after that.

Foxconn indicated its commitment to India by announcing on Nov. 27 that it was investing the equivalent of more than $1.5 billion in the country, money that people familiar with the matter said would include production for Apple. The announcement didn’t mention the iPhone or name specific locations.

Global iPhone shipments last year totalled more than 220 million, according to research firm Counterpoint, a number that has remained steady in recent years. Because almost all iPhones are made in either China or India, China will continue to account for well over half of iPhone output.

Apple has faced challenges in China this year beyond trade tensions with the U.S., including the Chinese government instructing some officials not to use iPhones at work.

“India’s trust factor is very high,” said Ashwini Vaishnaw, India’s information technology minister.

This year, for the first time, India-made iPhones were introduced on the first day of global sales of the latest model, eliminating the lag with China-made phones.

Supply-chain executives say hourly wages are now significantly lower in India than in China, but other costs such as transport remain higher, and labor unions sometimes resist rule changes sought by manufacturers.

In May, the chief minister of Tamil Nadu state, where Foxconn’s flagship Chennai plant is located, said he would withdraw regulations allowing a 12-hour workday, weeks after the state passed an amendment authorising the longer hours. The chief minister, M.K. Stalin, attributed the decision to opposition from labor activists.

Karnataka state has stood by a decision earlier this year to extend the workday to 12 hours, up from a previous limit of nine hours, though companies must seek approval to do so. A state labor official, G. Manjunath, said new rules also allow companies to employ women on overnight shifts without seeking government approval.

After years of battling local-content rules and other red tape, Apple this year opened its first retail stores in India. Abhilash Kumar, an India-based analyst at TechInsights, said the top-of-the-line iPhone 15 Pro Max was selling well in the country, though it costs about $700 more than in the U.S.

Apple is also making progress in India toward building a network of core suppliers, long a strength of Chinese manufacturing. Officials said this week that Japanese battery maker TDK would build a new factory in India’s Haryana state to manufacture battery cells to power Indian-made iPhones. A TDK spokesman declined to comment.

The moves don’t mean Apple and its suppliers are leaving China. Apple Chief Executive Tim Cook has traveled to China twice this year, stressing the country’s importance as a production hub and consumer market. He visited Luxshare, a China-based assembler that is taking a bigger role in the China portion of iPhone assembly.

On social media, Apple has assured Chinese consumers that iPhones selling in authorised channels are made in China. At an industry event in Beijing that Chinese premier Li Qiang attended in late November, Apple’s booth stressed the company’s business with Chinese suppliers.

Foxconn Chairman Young Liu said in November that China would continue to account for the largest share of Foxconn’s capital investment next year.

Liu has visited India at least three times in the past year and a half, meeting Prime Minister Narendra Modi and other officials. People involved in the planning said Modi’s home state of Gujarat in the west was one possible site of a future Foxconn plant. Meanwhile, the company has other projects in the works in the southern half of the country for electronic components and a plant likely to focus on making AirPods for Apple.

The plant in Karnataka state is under construction on 300 acres of land near the airport in Bengaluru, a southern city that is considered India’s tech hub. Officials involved in the planning said Foxconn has secured approval to invest nearly $1 billion in the plant and is seeking the go-ahead to put in an additional $600 million or so.

Combined with other projects, Foxconn’s investments in the state are likely to reach around $2.7 billion, they said.

Some iPhones are also made at a plant near Bengaluru that India’s Tata Electronics agreed in October to buy from Taiwan’s Wistron. Tata Group is the first local company to take on manufacturing iPhones.

“Apple has created an additional spoke in its India strategy by roping in the country’s largest business group—Tata—to be a part of its manufacturing system in addition to Foxconn,” said India’s junior information-technology minister, Rajeev Chandrasekhar.

—Shan Li in New Delhi and Selina Cheng in Hong Kong contributed to this article.

How Your Personality Can Affect Your Portfolio

Neuroticism and openness, in particular, are closely linked to investors’ willingness to buy stocks

Supplier Foxconn plans to build more factories and give India a production role once limited mostly to China