We’ve all come across the magazine and web quizzes. Answer five questions and you can find out what kind of exerciser, dieter, or driver you are.
I thought I’d have a little fun and apply this exercise to investors. I’ll spare you the quiz and get right to investor profiles, offering some tips for overcoming certain behaviors in the hopes of improving investing outcomes.
1. The obsessor. These investors check their portfolio balances on a daily basis. Not only does this consume a lot of their time, but it also likely causes blood pressure spikes. But what’s often worse is that obsessors make frequent, reactive changes to their investments.
Tip: Consider a new hobby. We all know from experience that markets are volatile. If you’ve based your portfolio on a solid asset allocation, then you should feel relatively comfortable with daily fluctuations in your account balance. If you can’t resist the urge to check or make reflex portfolio changes, then you might need to take a step back and check your asset allocation. Your risk tolerance might have changed. If that’s the case, start by taking our investor questionnaire. Sorry, I couldn’t resist giving a quiz!
2. The trendsetter. These investors follow market trends and are eager to invest in the latest and greatest. Trendsetters may have a tendency to buy yesterday’s top performer, or feel they can predict what’s going to be the next top country, sector, or stock.
Tip: Redirect your desire for trends to fashion or tech gadgets. While it might be compelling to follow the allure of the latest investment trends, it can be costly and counterproductive. History shows that last year’s top-performing fund or market segment won’t likely be this year’s “hot” investment. Instead, make sure you’re diversified across markets. Owning a portfolio with at least some exposure to many or all key market components ensures some participation in stronger areas, while also mitigating the impact of weaker areas.
3. The collector. These investors hold a patchwork of funds without a clear understanding of what they have and why.
Tip: Time to take an inventory and clear clutter. If you think about the typical changes facing average investors (e.g., job and 401(k) changes, marriage or divorce), it’s not uncommon to end up with a collection of funds or accounts over time. The problem is that you may end up with overlaps or gaps in your portfolio, which can cost time and money in the long run. The first step is to gather all of your holdings and categorize funds by their asset class and investment objective. Make sure they match your asset allocation, and then consolidate any redundant holdings. While you’re at it, look at the expense ratio of your funds to make sure you’re in low-cost investments.
4. The ostrich. These investors are so scared of the markets that they “bury their head in the sand.” They may be too nervous to invest in the market at all, or may constantly wait for the “right time” to make a move.
Tip: Ostriches don’t actually stick their head in the sand when frightened, and neither should you. When you think of “scary” things with the market, the focus usually is on market risk. While that’s a very real risk, the counter risk is inflation. By not investing, over the long term you may be overexposing yourself to inflation risk, which may manifest itself later in the form of financial shortfall. If you find investing overwhelming, start small. Determine your asset allocation, consider an all-in-one fund option, or a set of broad-market index funds to keep it simple. We offer a simple tool that may help.
5. The boomerang investor. These investors may have been thrown off course, but they learn from their prior investing decisions and bounce back.
Tip: We all make mistakes with investing, even the experts. The key is to learn from them. Life teaches us that hindsight is 20-20. The key is to identify and understand these mistakes, and focus on what you can do to get back on track. But successful investors do so sensibly. In these situations, don’t try to time the markets or take too much risk. Rather, focus on the factors that you can control—revisit your financial plan, check your asset allocation and rebalance if needed, and recalibrate your savings/spending rates.
6. The “GPS” investor. These investors understand their goals, have a solid investment plan, and save diligently (or spend wisely). They may be comfortable managing their own finances or working with a financial advisor to keep their plan on track.
Tip: Keep on truckin’. Admittedly, we all aspire to be GPS investors. And it really is achievable! By avoiding some of the pitfalls mentioned above, you may find that you’re closer to the right road than you thought. By following a few key principles—have a plan, built on sound asset allocation and diversification, invest in low-cost investments, keep a perspective of long-term investing and realistic savings/spending goals—the road to investment success can be easy to follow.
I’m interested in hearing what type of investor you think you are. Did I miss a type? And more importantly, have I missed any tips that an investor “type” might benefit from when thinking about successful investing?
Notes: All investments, including a portfolio’s current and future holdings, are subject to risk, including the loss of principal. Diversification does not ensure a profit or protect against a loss. Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.