How to determine your unique investor profile

By James Yeo

Many people start to think about investing when they have stashed away a good sum of money – say, $10,000. The common question people ask next is “how or in what can I invest this $10,000?”.

Unfortunately, the answer is not so straightforward. In order to answer this question, you would first need to know your unique investment profile. Here are five key factors to determine your investor profile:

1) Your Age

The younger you are, the greater the risks you can afford to take, and for good reason.

A younger investor is less likely to be overwhelmed by a significant financial loss than his older counterpart. This is because the younger investor has more productive years ahead in which to make up for losses and bounce back further. By contrast, the older investor may never fully recover due to his much lesser ‘earning and investing years’ ahead.

Here’s a simple illustration:

Investor A (age 28) has recently started working, and invests $10,000.

Investor B (age 67) has just retired, and invests $500,000.

A financial crisis with the magnitude of the 2009 US sub-prime mortgage crisis would probably wipe out around 60 per cent of both their investments.

Investor A would have lost $6,000 and be left with $4,000.

However, Investor B would have lost $300,000 and be left with $200,000. Both represent the same percentage of losses, but it’s a huge overall difference!

In a nutshell, the younger investor is often more likely to invest largely in shares that are more volatile but give a higher return, while the older investor tends to focus on less-risky instruments like REITs (real estate investment trusts) or bonds.

2) Knowing Your Risk Appetite

By definition, your risk appetite measures the degree of variability in investment returns that you can stomach. Or, in layman’s terms, it means “how much money you can afford to lose before panicking”.

Different people react to and manage risks in different ways. Some are ultra conservative while others are super aggressive. There are many types of risk profile questionnaires available these days, and you can just walk into a bank to ask them to determine your profile.

As an investor, it’s important to have a realistic understanding of your ability and willingness to withstand volatility so that you can find out the type of instruments that are most suitable for you.

Besides that, you should also keep in mind is that your risk profile changes as you become older, wiser and start gaining experience. The first one or two investments are usually the most difficult to execute but it will become relatively easier once you get the hang of it.

3) Your Emotional Mindset

Investing tends to be very emotional as your hard-earned money is at stake. The key emotions involved in investing are: Greed, fear, patience, discipline, guts, ego, worry, temperament, etc.

If you are unable to control your emotions and get carried away, you will become your greatest enemy. You have to keep your emotions in control and keep your life in balance.

Every once in a while when the stock markets get “hot”, I have come across some people who actually confessed to me that they wished the markets were open on weekends! This is a clear sign that they are getting carried away and their investments are probably in peril if this continues on.

4) Financial Background

How would you describe your current financial situation? This is a question most people are unaware of because it encompasses many different areas of your life such as:

• Marital status (single or married with housing loan)

• Dependents (financial support for kids and/or parents)

• Earning capability

• Lifestyle expenses

• Type of assets and their returns

• Financial obligations (car loans, tuition fees, loans, etc)

Analysing and coming out with your financial situation allows you to know where you currently stand and how much you can invest (or not invest). I have met people who earn more than $5,000 a month but live paycheck to paycheck because of their spending habits!

5) Financial IQ

I believe you have may heard of a story like this:

During a stock market boom, many newbie investors eager to make a quick buck sign up for trading accounts on their friend/relatives’ recommendation. However, in the end, they got their fingers burnt when the stock market bubble burst and led to a free-fall in stock prices.

By and large, the reason behind their investment losses is due to their lack of experience. Successful investors like Warren Buffett are able to achieve consistent returns over a long period of time even though he has gone through the few boom-and-bust economic cycles.

Therefore, in order to be proficient in anything, you have to put in the hard work and equivalent number of training hours. The same goes for investing, too. One can start building up your financial IQ through different means like reading investment books or emulating the strategies of successful investors.

Conclusion

To sum up, everyone has a unique investor profile because it hinges on many factors such as your investment horizon and risk tolerance, etc. There is no point in investing exactly the same way as Warren Buffett or Peter Lynch as all our unique investment profiles are different.

The key to success is to find out the best investing package suitable for you at your different life stages.