Your life stage does not determine your investment style, your personality does. Here’s what you need to know.
As an investor, there is no getting away from the risk-return paradigm. If you don’t take any risk, you will not have the opportunity to make higher returns. But if you are willing to invest in higher-risk assets, there is a possibility of earning a greater return.
So, what is the level of risk that you are willing to bear? This is a fundamental question that every investor needs to address. Your risk-bearing capacity often depends on a few factors such as:
- Funds available for investment – If you feel like you do not have sufficient funds to invest, you should first explore where your expenditure is going. If your discretionary spending is high, keeping an expense log can be an effective way to cut down spending in order to set money aside for investments.
- Age – As a general rule, a younger investor can bear more risk. Why so? This is because you would have more time to recover from any potential losses, as well as a longer time frame for your investment to be decently/comfortably profitable.
- The number of people who depend on your income – are you young and single? If so, you can afford to take riskier investments. But if you have young children or aging parents to support, you might be less willing to take higher risk investments.
If you are learning to invest, try out this investment personality test first.
Investing beyond your life stages
These factors are relatively well known to most investors, and your priorities will shift depending on which life stage you’re in.
Another pertinent factor which investors do not usually consider, but can help to establish the level of risk you are comfortable with, is, in fact, your investment personality.
Do you consider yourself a rational investor who copes well with uncertain outcomes? You may feel like you can conquer the market, but in fact, your confidence can lead you to overestimate your ability to pick winning investments, and underestimate the likelihood of things not going your way.
Or are you the sort of person who takes time and always does as much research as possible, so you have all the facts before making a decision? This delay can lead to you miss out on rising markets.
Understanding your mindset, and keeping your biases in check, can have a significant impact on your investment outcomes. It can also help you recognise unhealthy patterns, such as problem debt or impulsive consumption, which will in turn result in better, more informed and well-rounded decision-making.
Schroders has partnered with Decision Technology, a behavioural science research consultancy, to develop the following four investment personality types.
Which one are you?
Take Schroders’ InvestIQ test in less than eight minutes and find out your investment personality type now.
1. The vigilant planner
As a vigilant planner, your strength lies in your ability to take time for research and fact checking. While this means that you are unlikely to act on impulse, your anxiousness about investing can result in you taking investment decisions which make you feel comfortable (e.g. less risky investments), rather than what is appropriate to reach your goals.
Rather than trying to find out what you think is the optimal solution, set yourself distinct and appropriate criteria that when satisfied, moves you to take action. Remember, more information and time spent will not necessarily leave you less anxious about your final decision.
Fun fact: Most Singaporeans who have taken the InvestIQ test to date fall under this category.
2. The opinion hunter
An opinion hunter is able to handle uncertainty in investments but often follows the crowd. As you are comfortable in tolerating the ups and downs of markets, you’re focused on the future and will not let short-term incentives impact your long-term goals. You can however, be overly optimistic so you might not save enough to achieve your goals, or may overestimate the likelihood of investment success without fully considering the pitfalls.
Do not pick investments simply because everyone else thinks it is a good idea. Weigh up each investment on its merits and risks, and ensure they fit with your overall objectives. You can build confidence by taking time to research where to invest your money. This will help you understand how investments are likely to perform in different circumstances and help you make choices to meet your realistic (rather than optimistic) financial goals.
3. The independent rider
As the name suggests, an independent rider’s individualistic nature means that you are not influenced by what other people are investing in, relying instead on your own knowledge. Having a realistic attitude is good as you are able to weight up the pros and cons of an investment better than most. Your confidence however may lead you to overestimate your ability to pick winning investments, and you may also make more changes to your portfolio than necessary as you feel you can conquer the market.
Try not to check your investments too often as overtrading your portfolio based on short-term market rises or falls is a bad idea. Not only is it very difficult to do well consistently, over-trading may significantly stunt your potential profits due to, for example, transaction costs and timing the market incorrectly.
Think you already know your investment personality? Take the InvestIQ test now and the results may surprise you!
4. The level headed optimist
A level-headed optimist is as calm and tolerant as the title suggests. You tend to see the positive side of things, and do not get anxious easily. Your confidence however can lead you to jump to conclusions and rely on luck more than logic.
Don’t believe your previous successes will automatically lead to further successes. Instead, ensure you evaluate every investment decision thoroughly. Explicitly ask yourself how you might be wrong – and write down your answers!
Why Schroders’ investIQ?
As a global investment manager, Schroders helps institutions, intermediaries and individuals across the world meet their goals, fulfil their ambitions and prepare for the future.
InvestIQ is an educational platform which combines behavioural finance and investment education, developed specifically for a consumer audience to help improve their knowledge and ultimately result in better financial decision making. At its core sits the profiler which identifies the user’s investment personality. The platform also comprises of various forms of educational content, covering a range of levels of investment knowledge, spanning the basics to more advanced investment concepts.
Ready to learn about your investment personality? Take the Schroders’ InvestIQ test now.
This article is sponsored by Schroders. All views expressed in the article are the independent opinion of ZUU online.