Investing, like much in life, is a skill. Mastering it, however, is not as simple as sticking to theory. This Youth Month, find out how your financial personality influences your financial decision-making.
Choices in investing are often not black and white. Emotions can come into play and your personality type may influence how you invest your money. The two "investment personality" extremes are quite straightforward: on one hand, there is the risk-taker; on the other, an individual who is ultra-cautious.
We all know someone who's a risk-taker – the kind of person who is comfortable making choices that can have extreme positive or negative consequences. We also all know someone who's ultra-cautious – the kind of person who spends weeks buried in spreadsheets before they make the most straightforward decision. However, not everyone falls neatly into one of these two categories. Most investors fall somewhere between the two extremes.
Discovery financial adviser Louw Venter says that in the course of his work he meets many different financial personalities: "I see clients who lost money early and are now afraid, I see dreamy-eyed investors who are idealistic about how much money they can make, I see greed and I see fear. But you have to understand that everyone is different, and you have to work with the various personalities."
Becoming better informed
It's neither good nor bad to be a risk-taker, a cautious investor or somewhere in between. What's far more important is understanding your investment personality. Identifying what kind of investor you are can help you make better-informed investment decisions.
The benefit of understanding your investment personality is that you can compensate for areas where you are weaker. For example, if you know you are a risk-taker, you should be able to actively adjust for your instinctive response and possibly make more conservative investment decisions.
Venter says one of the important tasks of any financial adviser is to understand clients' investment style: "The knowledge base of the investor is critical in determining a suitable investment strategy. The adviser needs to find this out by asking the right questions."
Financial advisers understand the typical correlations between personality type, portfolio choices made and investment results. There is no one-size-fits-all answer. There never is. Your personality type is just one of the many variables (including life stage, debt, career, current portfolio) that you and any financial adviser have to consider when planning your financial future.
According to the American bank BBVA Compass, there are a few simple questions that will help you understand your financial personality. Learn what they are here to find out your investment personality.
The views expressed in this article are those of Louw Venter and do not necessarily reflect those of Discovery Invest. This article is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser.
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