What sort of investor are you?
In my role as a financial columnist, I exchange e-mails with dozens of readers every week on a range of investing topics. I also talk about investing with friends, neighbours and people I meet at social events or in the stands at my kids' hockey practices.
Through these conversations, I think I've developed a pretty good understanding of how people think about investing and some of the common behaviour patterns that get them into trouble. At the risk of generalizing, I've identified five investing personality types based on my unscientific observations.
See if you fit any of the following profiles.
One of the most common investor types, the Gambler craves risk, excitement and a big payoff – preferably by tomorrow. He sees the stock market as a casino and is easily seduced by "story" stocks – a mining company that's rumoured to be sitting on a huge find, for example, or a money-losing tech firm with a supposedly revolutionary piece of software. The Gambler takes excessive risk because he believes it is the best – and perhaps only – way to build significant wealth. He will happily tell you about all of his stocks that soared in price, but will be less forthcoming about the ones that crashed and burned.
The Trader is similar to The Gambler, with one notable difference: The Trader invests in higher-quality companies. The Trader's downfall, however, is that he can't resist selling perfectly good stocks after they have risen in price because a) in his gut he worries that the gains might not be sustainable and b) he believes in the old adage, "nobody ever went broke taking a profit." The Trader would be better off buying and holding – he would pay less in commissions and taxes – but he equates action with results and can't resist switching horses during the race.
The Nervous Nellie
Risk is a four-letter word to the Nervous Nellie, whose top priority is to not lose any money. Ever. She avoids the stock market and puts most of her savings into bonds or guaranteed investment certificates. She – or a family member – may have had a bad experience with stocks previously. Her obsession with safety comes at a price, however: Whereas Canada's main stock index has gained about 126 per cent over the past 10 years, including reinvested income, a typical bond exchange-traded fund has returned about half of that. And that was during a period when interest rates were falling (which is good for bonds) and the stock market suffered a major setback.
The Ostrich does not want to know about investing. It is too complicated and there's too much math involved. It's better just to let someone else do it. The Ostrich pays someone to look after his investments and asks few questions because he's too busy with work and family to pay attention to what's happening with his money. The thought has occurred to him that maybe he should take a closer look at what's in his portfolio and how much he is paying in fees (probably a lot), but his adviser is a good guy – he sent his kids a birthday card! – and the Ostrich is pretty sure everything is fine.
The Patient Investor
The Patient Investor is the rarest specimen of all. She may have been a Gambler, Trader or Ostrich at one point in her life, but she has learned from her mistakes and now takes an active role in managing her own investments for the long run. Although she is not a Nervous Nellie, she shares a desire for safety, which is why she keeps a portion of her portfolio in fixed-income investments, and the rest in high-quality stocks, index exchange-traded funds, or a combination of the two. Above all, she has learned that building wealth is a long-term exercise, measured in years or decades, and that short-term stock market blips are perfectly normal. The Patient Investor also eschews debt, lives within her means and sleeps well knowing that her money is being managed in her best interests.