Investing is a great way of creating wealth. By investing, you let your money work for you, instead of the other way around. The sooner you start, the better your returns.
Where to start?
I bet you have come across a fair share of articles and stories of investors making heaps of money from the stock market. There are wonderful success stories, but also horrible mishaps and failures.
The reason most investors don’t achieve financial success is because they set unattainable financial goals and manage their expectations incorrectly. The story of Icarus comes to mind, where he flew too close to the sun and lost his wings. In many cases, people make the mistake of taking on more risk than they can handle. What can you do to ensure you don’t share the same fate as Icarus?
Determine What Kind of Investor You Are
Identifying the type of investor you are, is the first step you need to take before you even consider spending a dime investing. You need to have clear-cut goals and expectations of what you want to achieve. There are a combination of factors that will determine your investment profile, and what investment strategy you should follow as a result.
Before You Invest, Ask Yourself the Following Questions
What kind of returns are you looking to make?
The level of return you are looking to achieve will directly influence the amount of risk and time you have to put into managing your investments.
When do you want to see returns?
Your answer to this question will indicate the amount of risk you are willing to take. If you want to see returns quickly, you should be open to a higher level of risk. If you are risk-averse, you will set up your portfolio with low risk, low returns investments.
What is your income situation?
Do you have a steady income stream to feed your portfolio or a decent sized nest egg to invest? Your income situation will influence the type of stocks you buy as well as your activity. The more you trade, the higher the transactional fees and taxes.
How old (or young) are you?
Age is a great indication of the amount of risk you should expose yourself to when investing. Usually, when you are younger, your situation allows you to take on more risk, where a retiree would rather settle for a low-risk investment strategy.
How active would you like to be in your investments?
Activity can become expensive. Your income situation might not allow you to trade frequently. If you don’t expect high returns, you don’t need to trade as actively as those who keep composure during volatile times and expect high returns.
What level of risk are you willing to take: low, medium, mid – high or high?
The amount of risk you are willing to take will determine in which market caps you will invest. Large-cap companies are usually safer to invest in than small or micro-cap businesses. I say ‘usually’ because you do come across what we like to call unicorns – rare exceptions.
If you are happy with a higher level of risk for potentially great returns, at a high frequency of trading, you are classified as a bold investor.
A bold investor invests across all market caps and makes 40 – 50 trades yearly. Using STRIDE, a bold investor can expect 19.63% returns.
You are classified as a confident investor if you don’t want to risk investing in micro-caps and prefer sticking to lower risk investments. You also prefer lower returns offered by small-, mid- and large-caps with low-frequency trading of around 20 – 30 trades yearly.
Using STRIDE, a confident investor can expect around 11.63% returns.
Mindful investors can expect medium returns at low risk, trading at a moderate frequency of 15 – 20 trades yearly.
If you are only interested in mid and large-cap investments and happy with 8-9% returns with few trades, you are classified as a mindful investor.
If you seek the very low risk and minimal trading of large-cap investments and are happy with the low returns they offer, you are classified as a cautious investor.
You can expect low returns at very low risk, trading at a frequency of 4 – 5 trades yearly.
Sally is a 3D value investor that created her diversified Little Acorns portfolio in November last year. Since creating her portfolio, she has achieved 15% returns. Before she started investing, she used the same method to identify which type of investor she is. Taking the collection of factors into consideration, she determined that she is a bold investor, seeking high returns and welcoming risk.
Knowing which type of investor you are, gives you a clear idea of what to expect from your investing journey and how to manage your investments and activity. By blindly entering the stock market, without any preconceived goals and expectations, will cause you to fly too close to the sun, adding to the number of failed investing attempts. It is in your best interest to identify the kind of investor you are before entering the market.