The One Question a New Investor Should Ask
No human being is created equal, and the same concept can be applied to investing.
As a new investor, one of the first things you should seek to understand is yourself. The question “what type of investor am I?” should always rank above “what should I invest in?” The better you understand yourself and your individual circumstances, the easier it is to devise an investment strategy that is suitable for you.
There are many ways to categorise an investor, but here are two widely acceptable methods:
Stage of life – how old / young are you?
As a rule of thumb, younger investors (e.g. below age of 30) have a better ability to recover from short-term losses as they can continue to accumulate wealth through their day jobs in the years ahead. As such, they can generally tolerate the ups and downs of risky investments.
In contrast, near-retiring investors (e.g. age 50 and above) should hold more conservative investments, as they can no longer rely on employment income to offset any investment losses.
Source & measure of wealth
The way in which an investor has accumulated wealth can provide clues about the investor’s ability and willingness for risk.
Wealth that has been created through entrepreneurial activities (e.g. though the sale of a successful business) may be the result of considerable risk taking. Therefore, such an investor may demonstrate a greater willingness for risk.
In contrast, an individual that has accumulated wealth through conservative spendings and careful savings over a long period of time will most probably demonstrate a lower degree of tolerance for risk.
Perception of wealth is important too. Regardless of whether one is rich or poor, how you perceive yourself will likely determine your willingness for risk. An investor that believes that his/her wealth is small (by whatever measure) will likely also have a stronger desire to protect it.
Why is this important?
Having a good understanding of the type of investor you are is extremely important as it can help determine what you ought to invest in.
Unlike cereal brands in the supermarket, picking the wrong investment can be costly and can significantly affect your well being (financially as well as emotionally), and you can avoid this easily by having a better understanding in your individual circumstances.
So, what type of investor are you?
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