Identifying Your Personality as an Investor (Beginner Tip)
With few exceptions, every investor’s goal is the same– to make more money. But your personality affects how you approach your investing, which is why every investor has a different investing strategy.
Peter Lynch (author of “One Up On Wall Street: How To Use What You Already Know To Make Money In The Market“) said that the “key organ for investing is the stomach, not the brain.” Investors need to know how resilient they are to risk, if they’re looking for income or growth and so on.
Unfortunately, there’s not a quiz out there that can perfectly determine what your goals are and how your personality should shape your strategy. But there are some key questions to ask yourself to better understand your identity as an investor. These are just a few to help you begin thinking about your personality as an investor:
How close are you to retiring? This is a big question when it comes to risk analysis. The closer you are to retirement, the less risky you’ll want to be with your investments. It could also determine the role of dividends in your investments. Someone in their 20’s or 30’s may be more willing to invest in more small-cap companies with lower dividends if they intend to keep their investments in certain companies for 10+ years.
How much time are you willing to spend every day researching potential investments and monitoring your own portfolio? For some, sitting at a computer, analyzing market trends and researching the fundamentals of various companies, sounds exciting and stimulating. For others, it sounds tedious and boring. Those who fall into the first category may find themselves pulling in and out of different companies. Investors in the second category may want to focus on five-year projections of large cap companies.
Are you looking to put money away for a major purchase like a car or house? When you may want to pull your funds out of an account can make a big difference too. Setting goals for yourself is a topic we’ll talk about in the future.
Do you currently have a safety fund to fall back on? Once more, risk plays a big role in understanding how you should behave with your assets. Investing isn’t going to make a poor man rich. So many investors suggest focusing on developing a steady income and creating a $10,000 (or about 3 to 6 months worth of living expenses) safety fund before you even think about looking a buying stocks.
What industries do you have the most knowledge about? An intelligent investor is a diversified one. But you may want to begin by investing in a company that you have extensive knowledge about about and trust. Then try branching out into other industries.
How comfortable are you with the idea of your investments losing value in the short-run if they’ll gain value in the long run? The stock market (generally!) rewards those who remain clear-headed when others panic and pull out their funds. But for those who want to be safe with their funds, even if that means lower ROI, there are bonds and CD’s that should fit your portfolio.
These questions may seem unimportant, but successful investors continuously evaluate and re-evaluate their goals and adjust their strategy and portfolio accordingly. Not properly identifying your goals could have a major impact on the performance of your portfolio over the long run.
For every new investor, I recommend reading Benjamin Graham’s The Intelligent Investor, which is widely considered the definitive guide to investing. The Intelligent Investor helps shield investors from substantial error and teaches the development of long-term strategies. It remains the most relevant, essential guide to investing since its publication in 1949. You can order The Intelligent Investor right here.