Getting to know who you are as an investor can help you make the right investment choices. We break down the more introspective points of investing so you can unleash your full investor potential, no matter where you start.
So, you want to start investing. You begin reading up on the various types of financial tools available and get lost in the jargon. With so many options, how do you know which to pick? Many of us simply say “yes” to anything so we don’t miss out, but this investor FOMO could cost you.
You’re looking in the wrong places. There’s no point in knowing everything about investing when you don’t know yourself. Investing does not require you to know everything about every option available. The most important thing to understand about investing is that it’s all about YOU. Why jump on the latest, most-hyped investment bandwagon if it doesn't serve your purpose?
Studies1 show that psychological factors have a greater impact on investors’ decision-making process than traditional finance assumes. Investing can be compared to dating, especially from a psychological standpoint. Simply swiping right on anyone mildly interesting can lead to numerous misadventures and heartbreaks. That’s why self-help dating guides emphasise the importance of knowing oneself first to improve your odds of finding the right partner. That’s also why matchmakers continue to thrive despite the presence of dating apps like Tinder and Bumble. The key lies in aligning your personality, goals, and values with the right pers…umm, investment.
And do you know why Warren Buffet is an investment idol? It’s because he has a clear understanding of desires and knows his own identity. These topics are essential for getting to know the investor within you and optimising your approach.
Like life and dating, it’s important to have goals. There are many different types of investment goals, and some may be more appropriate for your situation than others. It’s important to determine if you have any specific goal in mind, such as retirement planning, education saving, protection goal or simply just to grow your wealth. You can also categorise them into short-term and long-term goals.
Risk tolerance is your ability to bear risk. This can vary over time, depending on your age and financial circumstances. For example, if you are single with no dependents, you might have a greater ability to take on risk compared to someone who is nearing retirement.
Investment style is the way you approach investing. It represents your personal preference for how you invest your money, and it can be broken down into three main categories: conservative, moderate, and aggressive.
The risk/reward tradeoff
This concept describes the relationship between investment risk and potential return. Generally, higher risk is associated with the potential for higher returns. But that doesn’t imply the need to “go big or go home” every time. All investments involve some degree of risk; it’s just a matter of evaluating the degree of risk involved. Your expectations should be realistic in gauging your potential returns.
While it’s not a requirement to be an expert, having a grasp of the basics is important. For example, it is important to have a general understanding of how the economy works and how companies experience growth. If you own a rental property, knowing how interest rates and inflation affect your rental income and property value is essential.
You should also know the difference between active and passive income. Active income refers to earning returns by putting in effort, like through your job or a side gig selling things online. Trading in the stock market is also considered active income since you need to monitor the share price movements personally. On the other hand, passive income requires little to no legwork. An example is investing in managed funds overseen by professionals or buying a brick of gold and holding on to it for several decades. While passive income may sound wonderful, it often comes with some associated cost, like management fees for funds or insurance and safe deposit fees for holding gold.
Factors affecting risk profile
This next part is just as important. Because your investor profile is so intricately linked to personal identity, it can change over time. Various life events and experiences can shape who you are, and similarly, there are factors that can affect your risk profile, such as:
This refers to the time you give yourself to meet your financial goals and recover from any potential losses. If your time horizon is long, you may be more inclined to take on more risk compared to someone with a nearer-term goal.
Some people see their investment returns as a means of generating income to meet daily expenses. In such cases, they may not be comfortable taking on more risk.
As much as we may aspire to be purely analytical investing machines powered by AI, the reality is that we’re human. How do you react to market fluctuations and volatility?
Now, take the quiz below to get a better picture of what kind of investor you are.
Add up your points and see what type of investor you are!
This short quiz provides a glimpse into your investor profile and serves as a starting point rather than a comprehensive evaluation. It aims to provide you with some insights into your investment preference and help you envision your path as an investor. By understanding your risk tolerance and investment goals, you can make more informed decisions and build a portfolio that aligns with your goals.
For a more in-depth risk profiling assessment and personalised advice on building a tailored portfolio, we recommend reaching out to your RHB Relationship Manager.
1 The Impact of Psychological Factors on Investors’ Decision Making in Malaysian Stock Market: A Case of Klang Valley and Pahang, Department of Finance and Economic, College of Business Management and Accounting, University Tenaga Nasional, Suzaida Bakar, Amelia Ng, 2016.
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