Do You Know Your Inner Investor? The Psychology of Investing

My last blog provided some tips for securing your financial future before you become unable to handle your own finances. In this second blog of our series, I encourage you to get to know your inner investor – why you invest the way you do and what type of investments you prefer – and share it with your financial planner and/or whomever you have designated to handle your finances down the road. Why is this important? Because a deviation could signal the beginnings of cognitive changes and/or the possibility of undue influence.

Our investment tendencies are shaped by objective traits (age, gender, income); subjective attitudes (emotions, cognitions), and how we handle risk v. return. The research on investment behavior and personalities is overwhelming! But there seems to be consensus on four general investor types: (1) The preserver – deliberate and cautious; holds on to investments because they are afraid of risks; strong emphasis on financial security and preserving wealth; (2) The accumulator – risk takers; interested in accumulating wealth (aren’t we all!); actively involved in handling their investment portfolio; strong believe that they made the correct choice; (3) The follower – follows friends and trends; little aptitude for investing; may not have a long-term plan; (4) The independent – analytical, critical thinkers; actively involved in investment process; takes time to understand investment; willing to take risks; willing to stick with investment plan. Most people are a mix of these types. However, together, they all boil down to the question of how much risk can you tolerate? The answer to this question depends on how much money you have to invest; what your financial goals are (short term, long term, or in between); your timeline for achieving your goals; and your emotional ability to deal with risk. In addition, our risk tolerance changes with age – as we approach retirement, we tend to have less risk tolerance. Those with more money tend to take higher risks. If you have a long-term goal, you may tend to be more risk tolerant. These investor types can also be divided into the broader categories of passive v. active – passive investors often depend on their financial planner to do their planning and investing whereas the active investor takes responsibility for their financial future. Your financial planner should know your investment style in order to suggest products that are consistent with your financial goals and your risk tolerance. If they don’t, you need to educate them so that they don’t sell you products inconsistent with your income ability, timeline, and risk tolerance. Otherwise, you could end up a victim of financial fraud or undue influence.

Get in touch with your inner investor. If you don’t know what type of investor you are or your risk tolerance, take one or more of the many investor personality and risk tolerance assessments online – the results might surprise you.