It takes all sorts
When it comes to investing the dominant line of thinking seems to be that we’re all sensible and coolly rational people.
And yet, we should know that when it comes to financial decisions this is not the case, and it could be one of the most damaging beliefs in investing.
We all experience a range of emotions every day – love, sadness, happiness, anger – and there’s no reason it should be any different when it comes to money.
Markets continue to cycle, driven by groupthink and the human emotions of fear and greed, and those without a systematic approach are routinely punished with cruel results.
The 9 types
The Enneagram is a model of human psyche which is understood to identify 9 interconnected personality types.
During our coaching programs we find that we come across the same three personality types very often, because these are the personality types which place a value on money.
The three types we most commonly see are type 3 (achiever/performer, driven by the need for significance), type 5 (thinker/observer, driven by a desire for financial security), and type 7 (enthusiast/epicure, motivated by adventure and freedom).
Sometimes we have one dominant personality type, with a second personality type ‘wing’.
We’ve developed our own personality assessment you can take for free, which leads to your own investment map (see at the end of this post for details of how to get your free investment map).
The risk/reward trade-off
Stock markets are all about the risk/reward trade-off.
Some of us are brave and carefree and happy to take risks if we believe the rewards are there.
These folks tend to be classified as risk-tolerant.
Others who are more cautious and focus on the risk side of the equation would be deemed more risk-averse or conservative.
The truth is it’s a continuum, rather than specific points.
For example, when you go to a financial advisor, they will ask you about your risk level as it’s an important aspect of developing your investment strategy.
However, most of us know little about our innate risk level and usually only understand more when we have some context.
We answer the question on risk along the lines of ‘about the same as most people’.
The problem here is twofold.
First, your risk level may be high or low because of your personality, but we aim to show you that should not play a large role in developing an investment strategy.
The simple reason for this is that when the stock market is cheap, you should – if the cycles are understood properly – increase your investments rather than reduce them.
You should like low prices because this means there’s a high likelihood that future returns will be good.
The other problem relates to timing.
In the midst of a stock market crash, most people believe themselves to be risk-averse rather than risk tolerant.
In other words, emotions can run high, clouding calm and rational judgement.
Elements of decision-making
There are two major elements to your decision-making.
One is your personality, and the second is the influence that your family, friends and the wider society play in your decision-making.
Although we tend to have much in common, whether we like it or not we all have our own strengths and weaknesses, quirks and foibles.
For this reason, it’s important to understand your personality type and have an investment map which allows and compensates for your potential risk areas.
Free assessment & investment map
You need to take a calm and rational approach to investing.
Although relying on gut feel may pay off once or twice, eventually you will get found out if you don’t have a systematic approach.
As the old saying goes, the stock market is an expensive place to find out about yourself!
To get your free personality assessment and investment map send us an email at one of our addresses below:
To find out more about our coaching programs see here.