Conservative investor or aggressive trader – which one are you?
December 12, 2013 by Editor, InvestingForMe
How you view your pennies in the piggy bank depends on your investment personality. When you invest your hard earned savings, do you tend to invest conservatively – buying and holding your investments for long periods of time? Or do you like to aggressively trade your investments frequently following market trends, money momentum and anticipating the next hot market sector?
Well, whichever type of investor you are, identifying and understanding your investing personality is critical if you’re going to be successful in reaching your financial goals.
Determining your style: questionnaires vs. life experience
There are two ways to identify your investing personality:
- the quick and easy questionnaire method vs.
- the long and hard road of life experience.
The quick and easy method involves filling out one of the many investment questionnaires used by all of Canada’s financial institutions. They usually ask you to answer 20 or so simple questions, add up your score, and bingo-bango you’re pegged as a conservative investor (vs. moderate or aggressive, etc.).
However, complete the same questionnaire a week later, when the sun is shining and stock markets are all going up, and presto! You’ve now answered the questions a little more excitedly with that extra dose of vitamin D and now you’re coming off as an aggressive (active trader) investor! So, unfortunately, as you might have guessed, investing personalities based on some quick questionnaires are a little dicey and subject to change depending on which way the wind is blowing, to say the least.
The more accurate way to determine your investing personality involves the long and hard road of life, as with many hard truths in life, where your personality reveals itself more slowly as you gain experience making investment decisions over a number of years and where you gain experience with different investment markets (i.e. the good and the bad!). It’s during those ups and downs in the markets that you really get to understand your inner-investing personality! Do you have the stomach and nerves to hold steady through the good and bad markets? Do you welcome and enjoy the excitement of market swings and riding the waves up and down? Or do you only like it when your investments go up during good markets, but run screaming when your savings disappear in the bad?
Note: While most of us start down the long and hard road as young, inexperienced, optimistic aggressive investors, in time, as we gain knowledge and experience and ride a few of those scarier waves, we eventually evolve into more conservative investors along the way.
Finding your balance between fear and greed
Defining your investing personality is simply a journey of self-discovery in finding that fine balance between fear and greed – your fear of losing money and your desire to not miss out on making easy money (your greed).
Finding the fine balance between the two will depend on a few factors:
- Your family background can influence how you think about money. If you grew up in a wealthy family, chances are you view money differently than the rest of us where the chance of losing money on your investments is no big deal! If, on the other hand, you grew up poor, having to work hard for every extra penny, you might be more cautious with your investment decisions carefully avoiding any risks of losing it to a bad investment decision.
- Your age will also impact your investing personality. In our youth, we’re invincible, confident, book smart, wise-beyond-our-years and we have time on our side so we can afford to be aggressive in our investing. (At least that’s what the investment industry preaches!) With age, however, comes experience and understanding. As an investor, you can’t know your personality until you’ve experienced your first bad stock market. Making investment decisions when stock markets are going up is easy! Greed is your best friend. But making investment decisions during bad stock markets while watching your savings disappear right before your eyes, is hard – where your fear of losing more money is your enemy. It’s during bad stock markets that you begin to fully appreciate the role greed and fear played in your investment decisions and shapes and colours your future investment decisions.
- Finally, how you view money will also influence the investment decisions you make. To help make financial decisions easier, we often create mental short cuts by compartmentalizing our money. For example, we think of our RRSP savings as for our retirement. Our RESP savings is for the kids’ education. The TFSA savings is for next year’s girls’ Vegas trip. By compartmentalizing our money, we make it easier to manage – which can be a good thing. But when we carry this process too far, it can cause us to assign less value to some money and greater value to others. This commonly happens when investing or going on a trip to the casino. In both of these cases, we often create two compartments for our money – one labeled Hard-earned Savings and the other labeled Profits or Found Money. So we have mentally valued each dollar of savings differently depending upon which account it’s held within. We place a greater value on our hard-earned savings than we do the profits or found money we get when investing or gambling. If an investment goes down in value or we lose money gambling, we feel much better when we can say that it was just profit or found money that was lost, but we feel horrible if the loses have decreased our hard-earned savings. Even though a dollar is always a dollar, we often make the mistake of ascribing each with differing values and can sometimes mistakenly throw away money when we really shouldn’t. All our money is actually our hard-earned savings.
Note: Your attitude toward money is also influenced by a number of emotional triggers – some you can control and some you can’t, and that’s a whole other topic! But if you’re interested in learning more about these emotional triggers, visit Mental Framework and Investment Decisions.
Conclusion: know thyself!
Understanding your investment personality is important if you want to make better investment decisions. It doesn’t matter if your personality is conservative, moderate or aggressive, it simply matters that you understand which type you are and how your investment decisions should compliment your investing personality – not conflict with it.
Knowing exactly what kind of investor you are will save you time when researching the thousands of available investment options and can help ensure you select investments that are compatible and comfortable to own during both the good and bad stock market cycles.
Next week we’ll delve a little further into our fears and mental attributes that help shape our investing personality.
To read the next article in this series - Ease up: even the experts find it difficult to re-balance their investment portfolios