Are You Programmed to Be a Successful Investor?
When it comes to investing, our retirement planning rests in our ability to make sound economic judgments based on mathematically quantifiable numbers. We weigh the financial risks and rewards, and then make our decision.
Fortunately, or perhaps unfortunately, we are a little more complex when it comes to making decisions. For one thing, our emotions, developed after a lifetime of experiences, play a large part in how we act.
This fight-or-flight tendency helps us make good (some might argue “safe”) decisions; it prevents us from swimming with sharks or walking barefoot on lava flows. Granted, some aspects of nature can be somewhat predictable, but interacting with unpredictable investors on Wall Street is entirely different.
Despite our best intentions of trying to make rational decisions on something as black-and-white as finances and quarterly results, our plans are complicated by having to work with others who are attempting to interpret the same information—and coming out with different conclusions.
Too much avoidance of risk and/or fear can get in the way of making some really good investing decisions. We distrust our own conclusions and end up following the herd to financial mediocrity, or even ruin.
By better understanding who we are, where we come from, and what our fears and risk tolerances are, the better we can be at creating a solid, well-diversified retirement portfolio.
For example, at the most basic level, we know that the better we feel, the more apt we are to rush into something—and possibly make mistakes. A large number of optimistic investors—those who didn’t think revenues or earnings were important—saw their retirement fund take a beating at the height of the dot-com boom in 1999. On the other hand, a fear of losing money caused many investors to dump great stocks during the financial meltdown in 2008. They were also afraid to get back into the market and missed out on a five-year bull run.
Here are some questions to ask yourself to see if you have the right mindset for investing:
Are You a Risk-Taker or Are You Risk-Averse?: Investors who are the latter should consider taking a larger position in more conservative equities like bonds, certificates of deposit (CDs), Treasuries, and even some high-yield defensive plays like Johnson & Johnson (NYSE/JNJ) and The Coca Cola Company (NYSE/KO).
Investors who are more aggressive should have retirement portfolios that are heavily weighted toward stocks, currencies, commodities, and futures.
Are You an Introvert or an Extrovert?: A leading indicator of our investing style is rooted in whether or not we are introverted or extroverted. Generally speaking, extroverts tend to be overconfident, more willing to take risks, and less likely to have regrets. While these are great traits if you’re in sales, they might not make for the best strategy when it comes to investing. While the goal of investing is to make money, it should be tempered with objectivity and a long-term plan. Factor in the risk, not just the reward, and use the wisdom of hindsight; there will be times to invest aggressively and times to invest humbly.
Unlike extroverts, introverts aren’t motivated to be the center of attention; they can be more analytical and are less likely to feel threatened. Not the best traits if you want to get into sales, but investing, on the other hand…
Do Risk-Averse Introverts or Risk-Taking Extroverts Make the Best Investors?: It’s all about balance. Investing is influenced by psychological factors (the herd mentality, overconfidence, etc.), so to make the best investing decisions and ensure a comfortable retirement, we need to research and understand a company’s technicals and fundamentals.
We need to be aware of how our psychology impacts the way we invest, while ignoring the hype and enthusiasm and focusing on the facts.
Still, after everything is said and done, when it comes to investing and wealth management, there’s never reward without risk.