Spokane Journal of Business

When making investment strategy, know thyself

Personality traits can help, hinder success in market

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Being aware of trends and the successful identification of investment opportunities are quite small considerations in being a successful investor.

Trial and error as you learn the ins and outs of the financial markets, along with really knowing your personality as an investor, takes time and patience. Here are steps to help show you how to move the odds of success more in your favor.

Successful investing is a journey, not a one-time event, and you’ll need to prepare yourself. What is it you want to have? How long do you have to get there? What resources do you have or will you need? 

For example, do you want to retire in 20 years at age 55? How much money will you need to do this? You can use these questions to help create and guide the strategy you need to meet to your investment goals.

1. Know what works. Investing is a combination of science (financial fundamentals) and art (qualitative factors). And luck too, to be sure. The scientific aspect of finance is a solid place to start and shouldn’t be ignored. There are many texts, such as “Stocks For The Long Run” by Jeremy Siegel, or “One Up on Wall Street” by Peter Lynch, that help explain high-level finance ideas in a way that’s easy to understand.

2. Know yourself. I think that’s a major point. Nobody knows you and your situation better than you do. Identifying personality traits that can either help or hinder investing successfully, and managing them accordingly, is key. For instance, quoting Lynch, “You get recessions. You have stock market declines. If you don’t understand that is going to happen, then you’re not ready; you won’t do well in the markets.”

Here are a few types of investors that might help you to see where you might fit: individualist, careful and confident, often takes a do-it-yourself approach; adventurer, volatile, entrepreneurial, and strong-willed; celebrity, follower of the latest investment fads; and guardian, highly risk averse, wealth preserver.

3. Be aware. Bear in mind that you are potentially your own worst enemy. Depending on your personality, strategy, and particular circumstances, you may be sabotaging your own success. 

For instance, a guardian would be going against their personality type if they were to be a momentum trader, looking for short-term profits. If you’re risk averse and a wealth preserver, you’d be far more affected by the large losses that can result from high-risk, high-return investments. Be honest with yourself. Identify and modify factors that are preventing you from investing successfully or are moving you away from your comfort zone. 

4. Be disciplined. Sticking with your best long-term strategy might not be the most exciting investing choice. However, your chances of success should increase if you stay the course without letting your emotions get the upper hand. To again quote Lynch, “The key to making money in stocks is not to get scared out of them.”

5. Be willing to learn. The market is hard to predict, but one thing is certain: At different times, it will be volatile. Learning to be a successful investor is a gradual process, and the investment journey is typically a long one. At times, the market will prove you wrong. Acknowledge that and learn from your mistakes. When you succeed, celebrate.

Finally, understand that there’s no such thing as a risk-free portfolio.

A risk-free investment is one with no chance of default. The 90-day U.S. Treasury Bill is the security primarily used to represent such an investment. Further, the risk-free rate from the T-bill represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. As this is written, that rate is 0.99 percent pre-tax.

If asked about the risk to their portfolios, most people only associate risk with market risk—the chance that an investment loses value. While certainly important, it’s by no means your only risk.

Diversifying across the range of risks is widely considered the best way to build a portfolio that can be depended on over time. You should be particularly sure to include what are termed noncorrelating assets; those that don’t all respond to market changes in the same way. This method ensures that no one risk will turn into the market torpedo that sinks your portfolio.

For example, as an example of noncorrelating holdings, stock and bond prices usually move differently from one another. Gold and bonds, among others, are also noncorrelating assets. Balancing those investment risks with a solid asset allocation helps to improve your chances of reaching your goals.

Consider the following forms of risk—not all inclusive, by any means—to decide if you already have taken a risk-balanced approach or, perhaps, should consider doing so.

Market risk is the chance that a downturn chews up your money. That said, it may be better to think of that as “principal risk.” Your investments face market risk in the stock, bond, gold, real estate, and most other markets. So, someone who is heavily invested in what the consensus sees as “safe havens” like bonds, thinking they’ll avoid market risk by doing so, has misunderstood the situation. A change in the conditions of the bond market, such as higher interest rates, could put their principal in jeopardy, particularly if they bought bond funds rather than holding the bonds themselves.

Purchasing power risk, or “inflation risk,” is widely considered to be the risk of avoiding risk—the opposite end of the spectrum from market risk. It’s the possibility that your money can’t grow fast enough to keep pace with inflation, especially important in light of increasing life spans.

Interest-rate risk typically relates to how rates will change. Say you decide to invest in a long-term certificate of deposit for your risk-free return. Locking in a low return today, and then having rates go up over the holding period, could have you losing ground to inflation.

Liquidity risk comes in several forms and affects everything from high-yield bonds to foreign stocks. Liquidity refers to the ability to turn your assets into cash readily. There are some fine, legal investments that aren’t liquid and can’t be sold if your money is needed on a moment’s notice. Always ask before you invest.

Political risk is the prospect that government decisions will affect the value of your investments. That covers everything from tax-rule changes to broad policies that might reduce a market’s potential. 


Michael Maehl is a financial adviser and Spokane-based senior vice president of 
Opus 111 Group LLC, a Seattle-based financial services company.
He can be reached at 509.747.3323.

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