When it comes to investing, the importance of getting an early start can't be overstated. The time value of money means that $5,000 per year invested from ages 25 to 35 will ultimately compound to more than that same $5,000 per year invested from ages 35 to 65.
But investing your hard-earned money before you have a solid investment philosophy in place could mean spinning your wheels with a too-diversified portfolio that doesn't help you achieve your financial goals. It's important to understand how you'll handle investment risk and why you make certain decisions before you create a strategy.
Read on to learn more about some common investor 'personas' and how they can drive your financial plan.
The Guardian persona tends to be big-picture oriented. By focusing on a broad general philosophy and the greater purpose of investing, Guardians place a priority on wealth preservation and are always conscious of what they want their investments to accomplish. The big-picture mindset of the Guardian investor means they can often be slowed down by the nitty-gritty decisions of investing; instead, Guardians thrive with the convenience of automatic contributions and fund purchases, letting them focus their investment energy on long-term strategies.
The Chief investor focuses on personal intuition and their own honed instincts over balance sheets and price and earnings comparisons. Chiefs highly value their own autonomy and are firm in their convictions. Chiefs also have a well-grounded sense of risk and are willing to put ideas into action, but are unlikely to pursue a new investment path if they don't have a good feeling about it. By making a concerted effort to seek out high-quality investment information, Chiefs can ensure they have the necessary background to formulate a reliable gut instinct.
The Inspector investor tends to be a "keeping up with the Joneses" type and can sometimes be burned by chasing trends but is always focused on seeking out new and better investment information. Inspectors can benefit from being early adopters of a hot new stock but must be mindful of making sure the information they're consuming is reliable and balanced. Doing so ensures that they're not taken advantage of by new companies and stocks that don't have much long-term staying power.
The Outlaw is an active investor who likes to roll up his or her sleeves and dive right into the investment process. Outlaws can often be contrarian investors and are willing to act decisively when taking investment risks. Although Outlaw investors often have a higher risk tolerance than other investors, this appetite for risk can be tempered by their ability to step back and assess when Inspectors and other investors are jumping on a trendy new bandwagon.
Whether you fit neatly into one of these categories or are a mix of two or more investor personas, knowing what drives you to make decisions can give you much-needed insight into your investment philosophy. In summary,
- Investing sooner rather than later can allow your early investments to compound—but going beyond your own risk tolerance can lead you to make knee-jerk investment decisions that may not be in your best interest.
- Knowing your unique investor persona can help you develop your strategy and philosophy in accordance with your risk tolerance and future income needs.
- Because investment advice isn't one-size-fits-all, it's important to have a strategy that's tailored to you.
Find out what kind of investor you are by taking the short online assessment at RMR Wealth Builder's website. Then, contact RMR Wealth Builders to seek out a personalized Financial Plan. This Plan utilizes a Behavioral Risk Assessment that can help us translate your unique financial picture into an objective framework for you to follow as you travel the path to financial independence.