What Kind of Investor Are You?

For some the answer to this question is fairly simple and straight-forward, for others the answer may not be as clear which could possibly lead them to a series of trial and errors as they try various investment strategies on for size. Observing this over the years I have found the investors with the greatest amount of confidence when answering this question also have a keen sense in answering the question: How well do you know yourself?

Are you brave or timid? A maverick or middle-of-the-road? Do you pay attention to every little move in the market–or could you not care less?

The trick to finding a balance is to adjust your investing strategy to your personality. If you can whistle the theme to CNBC’s Squawk Box, you might have the aptitude to do well as a trader–but you might also find yourself following the heard and entering investments closer to a top rather than a bottom.

If you’re too busy changing the grand babies diapers, earning a living or traveling the world to pay attention to the day’s winners and losers on Wall Street, you might be best off working with a professional that understands who you are as an investor or is skilled in helping you figure this out.

The world of investing includes all types, from aggressive stock jockeys to conservative widows and everything in between. The blending of this art and science called investing pivots on an understanding of one’s temperament and a knowledge of the dominating factors influencing the markets trends. Making the knowledge of, who you are, just as important as knowing the risks associated with different strategies of investing.

Who Are You?

While the answer to who you are can and will change over time, for the sake of an investment thesis we will operate from the viewpoint that the key to this answer is found within the understanding of your temperament.

Successful investors are created not because they have the perfect timing or tons of money. They become successful because they are able to identify their natural inclinations to risk and volatility, setting the stage for them to use philosophies and strategies that best match the way their brains are wired. The good news for most of us is IQ and successful investing are not directly correlated.

A good understanding of your temperament is more valuable in investing then your ability to pass a test.

To explore that theory we have come up with a few questions that may help you gauge your temperament and identify the investing strategies that are best for you if you have a time horizon of 5 years or more.

Question 1 is to help get a feel of how involved do you want to be:

When you have trouble with your computer, you:

A) Call the local computer whiz and have him fix it.

B) Look through the manuals or google for answers until you’ve found the solution, calling in the computer guy if your search leads you to frustration.

C) Hack into the computer’s operating system and alter the code so it runs faster and better than before.

Answer: If you answered A, you generally prefer some hand-holding, and you may well prefer to leave the gory details of investing to an investment advisor or broker. On the other end of the spectrum, there’s the C type–the sort of person who reads the 10-K footnotes for fun and is most likely to find themselves self directing their portfolio. And in the middle, answer B: They know enough to get around, but they’re willing to ask for help if necessary, providing them a solid foundation to work in partnership with a financial expert for when they need a little extra help while following some of their own investment ideas.

2. Volatility : What kind of volatility are you willing to endure on the road to wealth?

A. I’m not looking for massive growth – I’m willing to settle for a couple years of so-so returns so I don’t lose a lot of money.

B. I’m willing to endure a few white – knuckle periods knowing I have enough time to recover

C. I’ll hold on for dear life – even while everyone else is bailing – in fact I may even buy more if I truly believe that the long term payoff will be there.

D. I can stomach volatility and am willing to speculate if it means being in the right place at the right time.

If you answered A- You’ve probably worked hard for your money and even if it means passing up headier potential returns, you’re most comfortable limiting your exposure to risk. Focusing on lower risk assets or investments with guarantees may be the best for you.

B answers – Fundamentals and discipline are important to you and assuming your time frame matches with market trends you will do well with a diversified portfolio that includes stocks, bonds and alternatives.

C answers may have an underlying belief that opportunities are greatest during times of distress and as long as your time frame and depth of available cash are significant you may be prone to be a buyer when everyone else is a seller.

D answers are all growth all the time investors that may have the most interest in higher risk equity and commodity assets and the use of derivative products like options.

3. Income Needs : Your need for cash flow from your portfolio for monthly living expenses is:

A. Important and necessary to maintain your lifestyle

B. Somewhat Important, I use some of the income produced but could live without it (although I don’t want to)

C. Unimportant, the money I have for investment is not needed for my lifestyle, I may need it for a surprise or if my expenses spike up when I get older.

Answer A’s are better suited for lower risk income producing investments and strategies with an emphasis on current income. Certain types of bonds, preferred stocks and annuities could be candidates for you as well as strategies focused on low volatility and correlation to the equity markets.

Answer B’s have some freedom to venture out a little further on the risk scale by including some growth oriented investments such as stocks, mutual funds, equity ETF’s and variable annuities to their mix.

Assuming answer C’s are risk takers they can include higher risk strategies including Managed Futures, Commodities and Options within their portfolio. They also have the luxury of doing nothing if they so choose.

4. Question 4 is a 2 part question to determine your level of skepticism.

Question 1: People are basically: A) Decent, if fallible B) Naive and easily fooled C) Out to get what is best for them.

Question 2: The stock market downturn of the past few years was:

A) A correction that will recover and it won’t be the last correction we will see B) Just the beginning of a 60-year bear market C) Of no consequence to me, since I live alone in a cabin in the woods with a sawed-off shotgun and a hoard of gold.

Answers: If you answered A to these questions, you’re a healthy skeptic. But if you answered B or, C, your skepticism may be preventing you from seeing opportunities. Try to rein in your skepticism and put some of your money back to work in the market on dips. Over the long haul markets usually go up, you know.

If you found yourself answering mostly A answers then you will benefit from the guidance of a financial professional as long as they have a skill set for managing risk and honest communication. On a scale of 1 to 10 with 1 being the lowest risk and 10 being highest, you are going to find your comfort zone somewhere between 1 and 5.

For mostly B answers you may find yourself falling between 5 and 7 on the same scale and because your interest or ability to invest a significant portion of time into your portfolio may be muted ,working in partnership with an investment advisor that can oversee the details and execution of a plan while reporting back to you the relative performance of your investments on a quarterly or yearly basis.

For those finding themselves with mostly C and D answers your temperament is best suited with a portfolio structure that allows you to keep your hands on the pulse of your accounts while setting aside a good amount of time for you to research your investment ideas and the products that may give you what you want.

Now that we have worked through this exercise and assuming you’re still awake let’s segue and close with a brief conversation about risk.


It’s important to remember that we can’t predict the future, all we can do is enter into investments and investment philosophies based on assumptions and if those assumptions are off an adjustment may be necessary. This is where the phrase “discipline over conviction” can be very helpful in keeping a calm demeanor in years like 2001, 2002 or 2008. The biggest flaw we see when we provide portfolio stress tests and evaluations is the lack of risk management.

It is important to understand the risks one is taking…and to be as certain as possible that the risks and the rewards align intelligently.

Every investment carries some degree of risk, the successful investor merely insists that he receive compensation commensurate with the risk he assumes.

That’s easy to say, but how do we do it? Most of us have a hard enough time identifying a truly compelling investment opportunity, much less trying to assess the risks involved. You don’t have to be an expert stock-picker to rack up expert investment returns. But you do have to build a risk-resistant portfolio – one that is diversified in ways that will provide genuine protection against severe capital loss.

Doing so is something we would like to invite you to do by joining us for 1 of 3 upcoming “What Kind Of Investor Are You” workshops we will be hosting through the first week of May. Click on the link to learn more and RSVP. Because we are making this an interactive workshop we are limiting the attendance so make sure to pick the date that fits your schedule best.

In the event you cannot make one of our events you are welcome to contact us to discuss proper ways to manage your investment risk.

We look forward to seeing you.

Warmest Regards,

Colby McFadden
Quiver Financial
Newport Coast Asset Management

The opinions expressed are those of Colby Mcfadden and Quiver Financial as of April 7th, 2012 and are subject to change due to market or other conditions. This is not a solicitation or recommendation of any investment; always consult a Financial Advisor before investing into any investment. Securities offered through Newport Coast Securities member FINRA/SIPC. Advisory services offered through Newport Coast Securities a registered investment advisory.