by JANE MACDONALD, FINANCIAL PLANNER, PARTNER
Even if two investors have similar financial goals, there are many different strategies and methods to achieve those goals. For this reason, it’s important to find your investment personality.
Your investment personality ultimately affects your financial and investment decisions, which is why, as financial advisors in Tennessee, the team at TrustCore takes a holistic approach to financial planning. We get to know our clients by discussing their goals, their concerns and their true financial risk tolerance. This helps lay the groundwork for a personalized financial plan.
Do you know what kind of investor you are?
Schedule a no-strings-attached conversation with the TrustCore team to see how we can help.
Aggressive
“Gene” is an aggressive investor. Aggressive investors are typically focused on making above-average returns. They can tolerate risk, and may even welcome it. However, there are pros and cons to this investment personality.
Pros
Because of their high risk tolerance, aggressive investors like Gene tend to stay in the market longer, and therefore, have more opportunities to experience financial growth.
Cons
As you probably guessed, aggressive investors can experience tremendous upsides, but also serious downsides. If a stock has the potential to grow 20 percent in a year, for example, there’s an equal chance it can fall by that much as well. Aggressive investors can experience the strongest financial wipeouts of any investment personality. When you’re younger and therefore have more time until you reach retirement and ultimately have to live on your investments, you have years, if not decades, to possibly recover from losses. If you’re getting closer to retirement, on the other hand, a major loss can be devastating.
Conservative
“Jeannette” is a conservative investor. Conservative investors fall on the opposite side of the spectrum than aggressive investors. Conservative investors prefer low-risk investments. They don’t do well with market volatility.
Pros
Conservative investors like Jeanette seldom experience significant losses in their investments, because they’re typically not heavily invested in stocks. Though markets fluctuate, a conservative portfolio may not even be affected. For example, between 2007 and 2009, roughly the timeframe of the Great Recession, the S&P 500 lost more than 50 percent. A typical conservative portfolio has a much lower allocation to stocks, so naturally, these portfolios can potentially be much less affected by stock market volatility.
Cons
While conservative investors aren’t typically as affected by market declines, they’re also less affected by market upswings. When stock markets experience a wave of price increases, conservative investors generally only receive drips of growth. Eliminating the potential for losses can proportionately disable the potential for gains. An overly conservative portfolio may also not keep up with inflation.
Moderate
“Alice” is a moderate investor. Moderate investors fall somewhere in between conservative and aggressive. A moderate investor looks for a combination of capital appreciation and income protection. Moderate investors tend to accept some risk, but not a lot – nothing too hot or too cold. As a financial advisor in Tennessee, I have noticed that most investors fall somewhere in the moderate ballpark.
Pros
Moderate investors like Alice tend to be well diversified, so when parts of their portfolio zigs, the other zags.
Cons
Though the risks are somewhat abbreviated, moderate investors may not maximize their portfolio returns, potentially leaving money on the table.
Unaware
“Joe” is an unaware investor. In our experience at TrustCore, these types investors are actually the most at risk – perhaps even more so than an overly aggressive investor. This is because an unaware investor doesn’t typically have a plan in place. They’re not sure what they’re investing for (long-term goals) and therefore, how much they even need. This lack of knowledge can cause them to make investment decisions uninformed by fact-based analysis. An unaware investor may invest solely on stock tips, for example, not taking the time to develop any understanding of markets or asset types, or any overall investing framework.
These portfolios can be hurt by trading fees, losses due to panic selling or even overconcentrated stocks that could instead be generating important income.
The good news is that an unaware investor can become an educated investor, with a little direction. A simple, no-obligation conversation with a financial advisor can go a long way and provide the structure necessary for a successful financial plan.
If you think you fall into this personality type, start a conversation with the TrustCore team.
Pros
Though unguided, an unaware investor is an investor. Unlike someone who fears the market and keeps their cash in a coffee can buried in the yard, an unaware investor like Joe has jumped into the investment waters, giving him a chance of success.
Cons
When it comes to investing, what you don’t know can hurt you, and in our experience as financial advisors in Tennessee, unaware investors often learn this the hard way, unfortunately. One of the simplest and most effective rules of thumb in investing is to buy low, and sell high. But, if investors only buy stocks when they become popular, and sell stocks when they decline, they are doing the opposite, buying high and selling low. Unaware investors may fall prey to trends, stock tips and bubbles, which can cost them a lot of money in investment losses.
Why It’s Important to Know Your Investment Personality
Knowing who you are as an investor is an important first step. Knowing how you feel about volatility and how you’ll likely react to investing highs and lows can help you and a financial advisor create an overall plan that works for you. When talking with a financial advisor, make sure to discuss your age, time horizon, fears and needs.
If you’re still unsure of your investment personality – maybe you’re a little bit Gene, a little bit Jeannette and a little bit Joe – schedule some time to talk with a financial advisor. The team at TrustCore is here to help.
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