Investment Personality Types
What are 'investment personality types'?
Investment personality types basically tell you how involved you want to be in your finances, in your investments, in the research that you do. So I've identified three main categories. There's the ‘consumed investor'. A ‘consumed investor', is someone who lives and breathes for investing. They love it. If they won the lottery, they'd probably still be involved in their investments and still want to be actively involved in doing everything they can with their investments. A perfect example of that is Jim Cramer, the CNBC guru. He is obsessed with investing. That's a ‘consumed investor'. They represent probably less than 5% of the population. There aren't too many of them out there. The next category are the ‘involved investors'. The ‘involved investor' reads Business Week every week and likes to look at the performance of their accounts once in a while, has some ideas about what they want to do with their investments. Likes a little bit of activity, but certainly not to the extent of the ‘consumed investor'. Then, there's the third category. The ‘hands-off investment personality'. That's about 90% of the population. That's for the rest of us. The hands-off investor wants the benefits of the investment, but just doesn't have the time, the desire or the expertise to be that hands on. They just want to set it up and kind of forget about it.
How can I determine my investment personality type?
You have to ask yourself, "Do I like doing research?" Does the idea of looking at a companys quarterly report, or being on their quarterly earnings call - does that excite me, or does that just give me a headache? Do you read Business Week? Do you read The Wall Street Journal? Do you watch CNBC throughout the day? Are you constantly checking the activity in your investments? If you are, it probably means that, A, you like and enjoy investing, and B, that you've got the time to do it. On the other hand, if you get your account statements in the mail every month and you chuck them in the drawer, and the idea of reading The Wall Street Journal everyday just gives you a headache, then you're definitely a hands-off personality type. What you can do is go to www.sixdayfinancialmakeover.com and there's an online quiz. It's ten or eleven questions. You can take it and you can figure out what kind of an investor you are.
Will one investment personality type create wealth more quickly than another?
That's an interesting question, and I really don't know if there's a good answer for it. Some might say, if you're a consumed investor, if you're watching the TV every day, and you're reading, you're researching, you're doing this, there's probably a good chance that you're going to do better than everyone else. Maybe, and certainly, there are some consumed investors that do a lot better than the average, but at the end of the day what can happen is if we're so involved, if we're so consumed, we tend to make really short-term decisions. Instead of focusing on the long-term, the bigger picture, we're in and out. We make the decisions when maybe it's not the best decision to make. The hands-off investor would set it up and kind of forget about it, and think that it's probably not going to do that well, when in fact that kind of philosophy and that kind of strategy does really very well.
How can 'asset allocation' help me create wealth?
If you knew precisely the best investment that would produce the biggest return, you would just put all of your money into that. It would be very simple, and there would be no asset allocation. But, with asset allocation, you're under the assumption that "I can't predict the future, I don't know what's going to go up, I don't know what's going to go down." So you're spreading your investments across different kinds of asset classes and by spreading your assets across the different asset classes, you're also spreading your risk. So if one class is not doing well, that's ok, the others are probably doing better. It's a matter of spreading the risk and avoiding major losses.
