Are you cautious?
Are you adventurous?
Are you outgoing or more reserved?
Your basic personality type is of crucial importance when it comes to investing your money successfully. It forms the basis of your investing personality or investing type.
Before you invest your money in anything, you need to determine your investing personality.
Your investing personality drives your financial decisions and is based off of your tolerance for taking risks, your investing time frame, and your overall investing knowledge.
It’s also based on your experiences with money and your beliefs about money that were formed when you were young. All these factors combine to create your emotional response to money which greatly influences your financial success.
Whether you like it or not, your emotions affect your investing decisions. The more you can remove emotions from the investing equation, the better an investor you will be.
Why? Because investing emotionally will cause you to make investing mistakes.
Even if you think you can be emotionally detached from your investments, you can’t. The truth is that no one can really detach emotionally when it comes to money.
Much of how we approach money, spending, and investing comes from deep-seated and long-established patterns that started in childhood.
It could be that your financial habits mimic those of your parents, or they could be in reaction to how your parents spent or saved.
Everyone is different in how they process things that happen in their lives and how their decisions are shaped by family, friends, teachers, advertising, and experiences.
Most of the time, your emotional responses to money are unconscious and you aren’t aware of your actions.
Tied in with this is how you emotionally deal with the thought of losing money.
It’s quite complicated what goes on in our heads regarding money!
Successful investing over the long term is all about understanding and managing risk in a way that is acceptable to you.
This is the key point. You must learn as best you can about how you may react to the ups and downs that are part of investing. That is why learning your investing personality is so important.
For example, most people have the bulk of their retirement money invested in the stock market. The stock market is by nature volatile. It has crashed 50% or more twice in the last 15 years!
The truth is that no one knows what will happen in the stock market over the next few days or even in the next few years. The market could crash tomorrow or head higher for the next decade. This uncertainty makes people feel very uneasy.
Many people learned the hard way about their risk tolerance back in 2007-2009. People who thought they were aggressive investors panicked when stocks lost more than 40% and ended up selling their holdings at the bottom in early 2009. They then missed the fantastic rally to new all-time highs since then.
Others feared losing money so they put everything into money market funds that have returned less that 1 percent over the last 7 years. They now regret they were so conservative.
If both types of people had been more in touch with their investing style, they would have been able to position their accounts better to reach their long-term goals.
They also would have avoided the emotional ups and downs that come with volatile markets like stocks.
Personality types are usually broken down into 3 broad personality types:
Conservative
Moderate
Aggressive
Below are three quizzes that will help you determine your investing personality type, your risk tolerance, and money personality type.
You should be able to complete all three quizzes in about 10 minutes.
The following one-minute quiz will provide you with a score in terms of being Conservative, Moderate, or Aggressive.
My results showed that my asset allocation strategy is Aggressive. Part of the reason is that the quiz asked me my level of comfort and experience in investing in stocks and bonds, which is extensive.
Up next is a simple five-minute quiz that will help you determine your risk tolerance.
Investment Risk Tolerance Quiz
My results showed a score of 24, which means I have an average/moderate tolerance for risk, which I think is correct.
The third quiz is a short four-minute test that will give you a general view of your money personality.
In addition, investors fall into 3 basic action types:
These investors are the most hands-off. They look at investing as a lot of work, and don’t enjoy dealing with their money at all. The set-and-forget investor typically works with a financial advisor who takes care of everything for them. Their motto: “The less work, the better.”
Or, if they manage their own money, they tend to look for investments they can buy and then forget about.
Index fund investing works well for set-and-forget investors, as well as target-date funds that rebalance their portfolio allocations automatically each year.
The low-maintenance investor is the most common type of investor. They look for investments that don’t require a lot of work and that they can hold for the long term.
Many manage their money themselves, but some prefer to work with a financial planner or advisor to help find investments that are suitable for their goals.
The active investor is someone who prefers a hands-on approach to investing. They like making their own decisions; they enjoy picking stocks and following the markets on a daily basis.
The majority of these investors manage their own financial affairs and investments, and generally have obtained the financial education they need to succeed.
Which action type are you?
Finally, for those who want to go deeper, below is a link to a free personality test. It takes around 12 minutes to complete.
http://www.16personalities.com
This personality test is geared around personality types taken from the classic Myers-Briggs personality test.
Once you complete it, they provide you with a detailed eight-page description of your personality type.
In this test, personalities are divided into 4 basic types, with 4 more specific personality types under each basic type:
In addition, people are characterized as having one of each of eight possible personality traits:
You can learn more about the theory behind the test at:
http://www.16personalities.com/articles/our-theory
My results? I am a Defender (ISFJ-A). My role is a Sentinel and my strategy is Confident Individualism.
As a Sentinel and Defender I am a “very dedicated protector who is ready to defend his loved ones.”
My personality was described as introverted, calm, emotionally stable, having excellent analytical abilities, reliable and patient, supportive, well-developed social skills, and receptive to new ideas and change.
I’d say that’s pretty accurate.
So, how do you use the results of all these quizzes?
While none of these quiz results are intended to provide definitive answers, combined they should give you a pretty good idea of your investing style and personality as related to investing.
By learning and understanding your investing type, action type, and your risk tolerance, you will be better able to put together an investment portfolio that is suited for you.
The key word is you.
It doesn’t matter if you are conservative, aggressive, or in between; what matters is that your investments overall match your personality type and investing style.
Otherwise investing will become a source of stress in your life, and you will not follow through on any investing plan you set up.
Investing, just as in life overall, always involves some risk. The key is to fully understand the risk, determine if it is acceptable to you, and then proceed or not.
It’s important not to gloss over this. Too frequently, people get into investments that are too volatile for their personality. And what happens is that when the market falls, they sell out in a panic and end up losing money.
But for someone comfortable with volatility, they are able to hang on and make money.
So, understanding how you relate to money is vital.
Money is definitely a complicated emotional topic for most people, and the more you learn about your relationship with money, the better your investing results will be.
If you’d like to learn more, please check out my other articles and resources below to explore the links of money to happiness, retirement, creating the lifestyle you want, and more.