Are You One Of These 4 Investment Personality Types?

As an investor, there is no getting away from the risk-return paradigm. If you don’t take any risk, you will not have the opportunity to make higher returns. But if you are willing to invest in higher-risk assets, there is a possibility of earning a greater return.

So, what is the level of risk that you are willing to bear? This is a fundamental question that every investor needs to address. Your risk-bearing capacity often depends on a few factors such as:

• Funds available for investment – If you feel like you do not have sufficient funds to invest, you should first explore where your expenditure is going. If your discretionary spending is high, keeping an expense log can be an effective way to cut down spending in order to set money aside for investments.

• Age – As a general rule, a younger investor can bear more risk. Why so? This is because you would have more time to recover from any potential losses, as well as a longer time frame for your investment to be decently/comfortably profitable.

• The number of people who depend on your income – are you young and single? If so, you can afford to take riskier investments. But if you have young children or aging parents to support, you might be less willing to take higher risk investments.

Investing beyond your life stages

These factors are relatively well known to most investors, and your priorities will shift depending on which life stage you’re in.

Another pertinent factor which investors do not usually consider, but can help to establish the level of risk you are comfortable with, is, in fact, your investment personality.

Do you consider yourself a rational investor who copes well with uncertain outcomes? You may feel like you can conquer the market, but in fact, your confidence can lead you to overestimate your ability to pick winning investments, and underestimate the likelihood of things not going your way.

Or are you the sort of person who takes time and always does as much research as possible, so you have all the facts before making a decision? This delay can lead to you miss out on rising markets.

Understanding your mindset, and keeping your biases in check, can have a significant impact on your investment outcomes. It can also help you recognise unhealthy patterns, such as problem debt or impulsive consumption, which will in turn result in better, more informed and well-rounded decision-making.

Schroders partnered a behavioural science research consultancy to develop the following four investment personality types.

See if you can identify yourself in any of them.

1. The vigilant planner

As a vigilant planner, your strength lies in your ability to take time for research and fact checking. While this means that you are unlikely to act on impulse, your anxiousness about investing can result in you taking investment decisions which make you feel comfortable (e.g. less risky investments), rather than what is appropriate to reach your goals.

Rather than trying to find out what you think is the optimal solution, set yourself distinct and appropriate criteria that when satisfied, moves you to take action. Remember, more information and time spent will not necessarily leave you less anxious about your final decision.

Fun fact: Many Singaporeans who have already taken the investment personality test fell under this category.

2. The opinion hunter

An opinion hunter is able to handle uncertainty in investments but often follows the crowd. As you are comfortable in tolerating the ups and downs of markets, you’re focused on the future and will not let short-term incentives impact your long-term goals. You can however, be overly optimistic so you might not save enough to achieve your goals, or may overestimate the likelihood of investment success without fully considering the pitfalls.

Do not pick investments simply because everyone else thinks it is a good idea. Weigh up each investment on its merits and risks, and ensure they fit with your overall objectives. You can build confidence by taking time to research where to invest your money. This will help you understand how investments are likely to perform in different circumstances and help you make choices to meet your realistic (rather than optimistic) financial goals.

3. The independent rider

As the name suggests, an independent rider’s individualistic nature means that you are not influenced by what other people are investing in, relying instead on your own knowledge. Having a realistic attitude is good as you are able to weight up the pros and cons of an investment better than most. Your confidence however may lead you to overestimate your ability to pick winning investments, and you may also make more changes to your portfolio than necessary as you feel you can conquer the market.

Try not to check your investments too often as overtrading your portfolio based on short-term market rises or falls is a bad idea. Not only is it very difficult to do well consistently, over-trading may significantly stunt your potential profits due to, for example, transaction costs and timing the market incorrectly.

4. The level headed optimist

A level-headed optimist is as calm and tolerant as the title suggests. You tend to see the positive side of things, and do not get anxious easily. Your confidence however can lead you to jump to conclusions and rely on luck more than logic.

Don’t believe your previous successes will automatically lead to further successes. Instead, ensure you evaluate every investment decision thoroughly. Explicitly ask yourself how you might be wrong – and write down your answers!

So, which investment personality are you?

This article was first published on ZUUonline.SG.

(By ZUUonline)

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