What Type of Investor Are You?
Let’s play a game I like to call the “what if” game. What if you inherited $100,000 today? Now there are two simple rules to the game:
- You must invest the entire $100,000 into the stock market
- You would be given a piece of paper with four blank faces to record your feelings relative to the performance of your portfolio
Let’s assume that on January 1st you deposited your $100,000 into the stock market. On December 31st you pick up your year-end statement and realize that your portfolio was up 30%. So now it’s worth $130,000. If you were drawing on one of your blank faces how would you feel about that?
Year two comes around and you pick up your year-end statement and realize that your portfolio was down 11%. So now, your total portfolio value is worth $115,000. It’s more than what you started with but less than the prior year. How would you feel about that?
Year three roles around and again you pick up your year-end statement but this time you realize that your portfolio is down another 16%. So now you investment portfolio is worth $97,000. Now how do you feel?
Year four roles around and you nervously open up that year-end statement and realize that the market rebounded pretty well. Your portfolio is up 36% and is now worth $132,000. You can now breath a sigh of relief and yet again, you record your emotions on the sheet of paper.
So what’s the lesson behind this silly game? Quite simply it’s this, investing is as much emotional as it is statistical. Advisors can regurgitate stock market historical returns until they are blue in the face but the bottom line is all about how you as an investor respond when, not if, the market corrects. Are you the type of investor who worries about market volatility at night, or are you the type who is emotionally detached from market volatility all together?
The Bottom Line
Developing a successful game plan must be emotionally sustainable for you. At First Financial Consulting, we start by helping our clients understand what type of investor they are before implementing a game plan that is appropriate for them. It is certainly not a ‘one size fits all’ proposition. So, what type of investor are you?