This article is written as part of a DollarsAndSense.sg collaboration with For Tomorrow. For Tomorrow is brought to you by Temasek, in partnership with MoneySmart and DollarsAndSense. All views expressed in the article are the independent opinion of DollarsAndSense.sg.
When it comes to investing, your personality can play a big role in determining the type of investments you are likely to make, and ultimately, how successful (or unsuccessful) you will be in your investment journey.
Though many experts encourage investors to keep their emotions in check while investing, the truth is that this is a lot easier said than done.
We aren’t professional fund managers and we are not trained to look at our investments objectively. We get fearful when we lose money and way too excited when we make money. Unfortunately, these emotions can lead us to make unwise investment decisions that we wouldn’t have made if we were more objective.
Understand Your Personality Better
Understanding how your personality can influence your investment decisions can help you recognise your own biases. While this may not always prevent you from making mistakes, it may allow you to become more self-aware of the decisions you tend to make.
Here are the four main types of investment personalities that the majority of people would fall under.
Your approach towards investing is to make high returns. Even if you are new to investing, you are unlikely to make cautious decisions. You are constantly reading investment reports, analysis and news so that you can find an edge over other investors in hopes of identifying potential winners in the stock market.
At times, you find yourself putting more money into stocks that are performing well so that you can increase your profits. You rather enjoy the high returns given by just a handful of stocks than to try diversifying and spreading out your risk. You are always on the lookout for the next “winning” investment.
What To Look Out For If You Are An Aggressive Investor?
You might be tempted to look for “winners” all the time but this should not be at the expense of managing and diversifying your risks. Simple strategies to ensure this include diversifying your investments across different sectors and geographical regions even if you are particularly confident in one or two of investments. Remember, you are an investor, not an entrepreneur.
Avoid doubling down on stocks that are already declining in an attempt to prove yourself right, even after the market has proven otherwise.
Aggressive investors tend to feel the need to make moves even when standing still with their current portfolio is a better option. If you are tempted to do something, be it buy or sell a stock, ask yourself what’s the reason for doing so. You need to refrain from adjusting your position just for the sake of it.
You are constantly worried about losing money in your investment. You are more scared about how much you could lose, rather than how much you could make.
As such, you tend to make investments that you think are safer and will be resilient even if the economy declines. These include government bonds, high quality corporate bonds and blue-chip stocks, such as SingTel, DBS, CapitaLand Mall Trust, with stable income and profits.
What To Look Out For If You Are A Conservative Investor?
It’s perfectly normal for many new investors to be conservative. If you are new, chances are that you will want to err on the side of caution and not take big risks with your hard-earned savings.
Compared to an aggressive investor, a conservative investor may not see the need to review his portfolio regularly, since the expectation is that the companies he or she invests in should continue to perform well even during economic downturns. This, however, could pose a potential risk if overlooked.
Companies evolve over time and what used to be a company that runs a “safe” business could become one that is no longer as foolproof as it once looked. Even index stocks on the Straits Times Index (STI) can and do fail sometimes. That is why the STI is regularly reviewed and companies are routinely added and removed when deemed necessary.
#3 Passive (Income-Generating)
Your intention for investing is simple. You want regular returns for your investments. You prefer investments such as properties, dividend paying stocks, real estate investment trusts (REITs) and high coupon paying bonds.
Though you agree that companies such as Facebook and Berkshire Hathaway are great companies, you wouldn’t personally find them attractive due to their lack of dividends.
What To Watch Out For If You Are A Passive Income Investor?
While it’s great to receive regular passive income, it’s important not to base your investments solely on the yield you are getting.
Just because an investment is paying a high dividend yield does not necessarily make it better than one that pays out less. Investors need to understand the underlying fundamentals of the companies they are investing in. They need to ask themselves if the dividends being paid out each year is sustainable.
They should look at companies paying out lower dividends and ask themselves if they are investing in the growth of their business and have potential increase dividends in the future.
For example, if a company has not been making profits for the last few years but is still giving out dividends, investors need to be cautious about its ability to sustain the dividend payout. On the flip side, companies that have been re-investing in their businesses to grow its network and scale will be able to sustain their dividends or even grow them over time.
#4 Speculative (Or Gambling)
You love to speculate. You believed Chelsea would win the Premier League title and Golden State Warriors would become the NBA League champion. More importantly, you were willing to put good money behind your bets to make money from your speculation.
You take the same approach towards investing. You may buy a condominium in a new development with the intention of flipping it in a few years for a profit. Or you may participate in an initial public offering (IPO) without really knowing much about the stock just because you hear that the price would increase.
You enjoy the excitement of being able to earn a big payoff in a short period of time if you are right rather than waiting for your money to slowly accumulate over the years.
What To Watch Out For If You Are A Speculative Investor?
The biggest mistake you can make when speculating on stocks is to not recognise what it is that you are doing. Novice investors who are buying based on a rumour may not be able to differentiate between buying stocks with sound fundamentals and simply speculating.
Don’t get us wrong. A speculative portfolio, when well-managed, can generate great returns to investors within a short time. However, in order to do that, investors need to have lots of experience and spend plenty of time to identify these opportunities. Most retail investors do not have that kind of experience nor are they willing to spend that amount of time in research.
Don’t be confused between results generated by long-term investing and speculative investing. The returns may be similar but the methodology is vastly different.
Which Kind Of Investor Are You?
Are you one of the four kinds of investors mentioned above? Share with us on Facebook which type of investor you are and the kind of common mistakes that investors in each of these groups are likely to make.
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