August 22, 2022 | Article | 5 min Personal insights
What type of investor are you? Do you prefer to play it safe? Are you looking to take more risks? Do you dive into market research, or do you trust your gut? Let’s find out...
What if we told you your investment strategy likely parallels your personality? Your day-to-day decision-making is a great "jumping-off point" for determining what type of investor you are. Aligning your investment strategy with your personality can theoretically help you make the best decisions possible. After all, if you're not one to take unnecessary risks in life, why would you do so with your money?
Let's explore your investment strategies, determine your risk tolerance, and define your behavior towards personal finance.
Why Do You Need to Know What Investor Type You Are?
Your investment strategy stems from your personality. Therefore, it doesn't necessarily come with a "right" or "wrong" answer—it's you. It's distinctive. You can define your "investment personality" by determining your risk tolerance, savings goals, and when you plan on tapping into those savings.
Without a clear picture of what type of investor you are, you may invest in risky funds that contradict your risk tolerance. Or on the flip side, you may end up with a more conservative portfolio that doesn't meet your goals. Determining your investor personality allows for well-informed decision-making.
Ultimately, your investor personality boils down to how much risk you're willing to take—your risk tolerance.
Risk tolerance relates directly to your financial situation and investment timeline. Before moving assets around, you must determine your reliance on that money. If it's disposable, you may invest in more risky assets.
Regarding your investment timeline, determining your short, medium, and long-term goals is key to determining your risk tolerance. Short-term goals (buying a new car) often lean on low-risk investment options. Mid-term goals (saving for your child's college fund) can give you time to ride the market as it ebbs and flows, leveraging the ups while surviving the downs. Ideally, you have a safe mix of low and medium-risk investments.
Longer-term goals (such as saving for retirement) usually allow for more risk, as you have more time to recover from a "bad bet." Of course, that's contingent on how close you are to retirement—as you age, you'll want to consider moving your assets with more risk to more stable, low-risk investments.
What Type of Investor Are You?
Ready to figure out your investment personality?
Let’s take a look at a few different scenarios. Your answers can guide you in figuring out what type of investor you are, and what strategies make sense for you.
You've had your eye on a new smartphone for a while and decide it's time to pull the trigger. You arrive after work—perhaps 20 minutes before the store closes—and your friend throws a curveball. They tell you about a brand-new, limited-edition model that just hit the market. The new phone is going fast, and you don't have time to test it for your preferred features. Because of a strict no-return policy, you're stuck with whichever phone you choose. Do you:
- A. Stick with the original plan, and buy the phone you know you liked?
- B. Get in touch with a tech-savvy friend who knows more than you?
- C. Take the risk and buy the new phone?
You've got tickets to an outdoor concert tomorrow, but the forecast, unfortunately, calls for rain. You already paid for the ticket and all your friends are going. What do you do?
- A. Play it safe and see what happens. If the skies clear up, you'll go. If they get worse, you'll stay home.
- B. Plan for the worst and bring an umbrella. Would you rather have it and not need it, or need it and not have it?
- C. A little rain never hurt anyone, and carrying an umbrella around might ruin the fun.
As you're daydreaming about life on the Italian coast, your boss walks in and offers you a job abroad in Naples, Italy. The pay is the same, but your boss also plans to offer the job to your coworkers. There's only one opening, so it's now or (likely) never. With one week to decide, what’s your move?
- A. Decline the offer, hoping another opportunity arises. You don't think you're ready to ship off halfway around the world right now.
- B. Research the area and determine your current financial situation. Ask for more information regarding company compensation. Can they cover room and board? Travel expenses? Perhaps you can talk with coworkers who've worked abroad to see what they thought of the experience.
- C. Absolutely! We'll cross those other bridges when we get there.
After giving four correct answers, you're up to $1,000 in a radio trivia contest. The fifth and final answer is an optional double-or-nothing round. You can wager $500, or the full $1,000. What do you do?
- A. Don't play. At least you walk away with $1,000.
- B. Risk the $500, leaving you with at least half if you lose.
- C. Bet it all for the chance to double your money.
You order the same coffee every day: a medium-dark roast, one sugar, no milk. It's hot, delicious, and gets the job done. But this morning, you see a new "mystery coffee" on the blackboard behind the counter. It's the same price as your usual, and drinking more than one coffee always puts you over the edge. What’s the plan?
- A. You stick with your dark roast. Why fix what isn't broken?
- B. You ask the barista about the mystery flavor. Perhaps they can give you a sample? Though that takes the "mystery" out of it, huh?
- C. Harness that sense of adventure! You order the mystery coffee.
The Results Are In!
Pre-Investor (Mostly A's)
Simply put, a pre-investor isn't actively investing in the market.
You're concerned about maintaining a comfortable quality of life. Therefore, you’re unwilling to take unnecessary risks. You may also be a new investor, and might not know where to start. (Of course, there's no shame in seeking the guidance of a trusted financial partner!)
Pre-investors spend more on consumer goods than investing in their financial future. But while that's okay in your early 20s, you may be setting yourself up for failure as your 40s and 50s roll around.
Passive Investor (Mostly B's)
Passive investors delegate their strategies and investment decisions to their financial advisors and partners. While there's nothing wrong with that, you'll never become your own investing expert.
Then again, you're probably working a full-time job and perhaps raising a family. Because you don't have time to learn the ins and outs of the market, you'd rather pay someone else to do it for you.
Passive investors can lean on the basics of financial planning by owning their own home, funding tax-advantaged retirement plans, and saving at least 10% of their earnings.
Active Investor (Mostly C's)
Active investors run their investment strategy like a business. Investing might be their job, and they know all the ins and outs of the current market. They're not afraid to take risks, and have the capital to back themselves up in case one of those investments goes south.
Passive investors work hard to earn, but spend less time making their money work for them. On the other hand, active investors dedicate their free time to growing their wealth. This is often paired with a full-time job, meaning active investment strategies won't work for everyone.
By leveraging value-added strategies, active investors take full responsibility for their financial future. They understand the opportunities to make money, the inherent risk involved, and actionable strategies to mitigate that risk through market experience.
Plan Your Future Today
Whether you're a pre-, passive, or active investor, you can always rely on the sound advice of a trusted financial partner to maximize your earning potential. There's no reason to carelessly risk your assets while trying to invest on your own, especially if you're new to the market. Instead, you can lean on a financial partner like Illinois Bank & Trust, a division of HTLF Bank to determine your risk tolerance and build an investment strategy.
Get in touch with Illinois Bank & Trust, a division of HTLF Bank to speak with a representative with deep market insight. Share your results from our quiz to establish your investor personality and take the first step towards building a sound financial future.
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