What's Your Investment Personality?
There is no singular investment strategy that is perfect for every investor. Investors have varying risk tolerances and different investment objectives. Many factors go into finding investments suited to your financial "personality."
Integrate the right investments with your investment personality to find a strategy that works for you. Let's take a look at the three types of investors that typically invest in the market:
Active investors continually buy and sell different investments. Active investors include day traders, frequent stock buyers, and mutual fund investors. These investors need time to do their research, and to make decisions that affect their portfolio. Active investors trade investments often, and closely follow the daily movements of the market. They try to profit from timing the market, using either technical or fundamental analysis. Active investors use market dips to add to their portfolios and market highs to sell their stocks.
These investors plan to make money in the stock market, and buy and sell stocks accordingly. This personality type might be prone to taking more risks, mainly because these people are actively involved in their investments and anticipate high returns. Active investors also manage self-directed retirement plans and eschew costly broker fees, opting instead to invest using online brokerages.
These investors also look for ways to increase their knowledge by studying financial news and trends using the best stock market investment news and research sites, attending seminars, or joining investment clubs. Active investors who spend too much time reviewing their portfolios, or who have made too many risky investment choices, can sometimes benefit by meeting with a financial advisor. The advisor can help map out a plan to remove some of the responsibility shouldered by the investor, and if necessary, provide input on how to reduce the investor's risk.
Passive investors do not audit their investments on a consistent basis. They want access to the stock market, but they also want their investment decisions made for them. The number of passive investors has grown in recent years. Passive investors buy index funds, index exchange-traded funds (ETFs), and target-date retirement funds. These investors like to hold onto their investments for years without making any changes, as the funds do all of the work for them.
Passive investors can become more actively involved in their investments by making a commitment to improve their knowledge, and their earnings. The investor might start by meeting with a broker, 401k plan manager, or other financial advisor. The meeting should provide a detailed picture of current investments, with an eye to potential investments that increase opportunities for returns. Passive investors benefit from taking an active role in planning their finances, and from taking advantage of educational opportunities, attending seminars, and joining investment clubs. Conversely, these investors may be too reliant on financial advisors, and may benefit from purchasing some stocks from an online discount stock brokerage like Scottrade and TradeKing.
Conservative investors pursue safe investments with absolutely no risk. The safest investments offer guaranteed returns of principal, and investors know their capital will be returned to them. These investors rely on the historical performance of investments and old-fashioned thinking, and gravitate towards conservative investments like bonds, CDs, and Treasury Bills. Bonds issued by the federal government, state governments, and local governments are safe investments, since they are guaranteed by the governmental agency that issues them. The rate of return may be low, but the risk of default is virtually nonexistent.
Investors that want low-risk portfolios pursue these investment choices. Conservative investors can become more aggressive in their approach by working with a broker to invest in medium-risk investments. These investments act as a bridge between high-risk stocks and the more conservative types of investments usually made by investors.
The investments that are appropriate for you depend heavily upon your investment personality. Analyze how you would react to specific market events, and your level of interest in investing, to learn more about your financial character. Once you identify your investment personality, adjust your portfolio to match your needs. Determine if your investment personality impinges upon your financial goals, and identify opportunities in your investment plan. It might be time for a change.
What's your investing personality and how do you typically invest?
Mark Riddix is a frequent contributor for Money Crashers, a personal finance website dedicated to spreading awareness for financial topics like investing, smart shopping, and the dangers of credit and debt. Mark writes a weekly column for Benzinga every week.
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