What Kind of Investor Are You?

You have a relationship with money.

How you feel about money and what you believe about money will govern how you invest it. Most investor personality questionnaires offer a succession of not very subtle questions and then rigidly slot you into categories based on your apparent risk tolerance. Theyre about as accurate as reading your horoscope in a daily newspaper. But it is important to know what kind of investor you are - because that is what will determine the kind of investments that you are comfortable making.

• Bulls Bears Stags... and ChickensThe kind of investor you dont want to be...The kind of investor you might want to be...Bullsbears and stags are well-established beasts in the stock market jungle. You may feel like a chicken. If you do dont worry about it. Investment is about your future financial well-being not about machismo. Make the wrong investment decisions or for the wrong reasons and your wallet could feel the pain.Want to track your investments Moneyextra.coms free portfolio service has all the tools you need.Top of PageAre you looking for a share dealing account Do you want to manage your portfolio online but dont want to trade more than twice a month Try Moneyextra.com Trader!Top of PageWant to set up an online share trading account Will you be an active trader Check out Moneyextra.coms frequent trader service. Top of PageBuying Shares 8 top tips on buying sharesSelling Shares 8 top tips on selling sharesInvestments - Answers to your questionsMoneyextra.com

Bulls Bears Stags... and Chickens

You need to be clear about three things

 

• The level of risk you are willing to accept.
• The length of time you are prepared to invest.
• The investment return you expect to get.

First of all you need to determine your risk tolerance level. Risk is the amount of volatility and uncertainty youre willing to accept from an investment in seeking your financial goals.

 

Generally the higher the risk of an investment the greater its potential returns. The lower the risk the less likely it is for that investment to generate a higher rate of return.

 

Ask yourself "How comfortable will I be watching my investment go up and down in value" The more comfortable you are with so-called price volatility the greater the risk you are probably willing to assume.

 

Your next step is to be clear about your time horizon - how long you are willing to invest. Generally the more time the more risk you can afford to assume. The longer you are prepared to invest the more time you will have to ride out the markets ups and downs in pursuit of your financial goals.

 

Finally you need to take account of the return you are looking to get. Once you know how much risk you are prepared to take and how long you are prepared to invest you can focus on investments that will match those criteria and aim to generate the return you want.

 

The kind of investor you dont want to be...

There are lots of investors that you dont want to be among them

 

The Gossip

 

This investor gets a hot tip and plunges in. But that hot tip is based on third-hand rumour that rarely comes true.

 

The Sooth Heeder

 

Entrails and tea leaves are so Ancient World now sooth heeders pay hundreds if not thousands of pounds for tipsheets and complex computer models that churn out charts and forecasts promising stellar returns. The people who get rich from these things are those who sell them not those who buy them.

 

The Knee Jerker

 

Investors of this type were strongly in evidence in the stock market over the summer of 2007. They act before they think buying after the price has risen strongly and when it falls steeply they sell. What they dont lose on the actual market theyll endeavour to lose in trading costs!

 

The kind of investor you might want to be...

The Cautious Investor

 

The cautious investor understands that he or she needs to get a return better than the rate of inflation to maintain their financial position AND that in order to beat the returns available on cash deposits they need to accept some stock market risk.

 

However the cautious investor is uncomfortable about sharp falls in value and wants to invest in stable investments where the risk of this happening is limited. Keeping ahead of inflation and getting a slightly better return is more important than getting a high return only by accepting a higher level of risk.

 

The Moderate Investor

 

The moderate investor wants to see their money grow over the medium to long-term 5 years. As well as beating inflation the moderate investor knows that capital growth available from investing in the stock market gives them the best chance of achieving this.

 

Although not happy about a significant short-term set-back the moderate investor is willing to accept the risk as he she is investing for the longer-term. However sustained falls over a longer period might persuade the moderate investor to move to less-risky investments.

 

The Aggressive Investor

 

The aggressive investor wants to see real capital growth in the short-to medium term 3-5 years and isnt concerned about short-term fluctuations. This investor will be prepared to take on a wide range of stock market investments including potentially volatile shares where there are high potential gains but also where the risk of losing money is higher.

 

The aggressive investor may offset these high risk investments by diversifying into lower-risk areas and may only be making those high risk investments with money they could afford to lose.

 

So what kind of investor are you

 

See also

 

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  03 October 2007

   

2009-03-09 16:51:17 © Moneyextra.com