In terms of your investing personality, are you most like a shark, monkey, or ostrich?
Over the past year I’ve been attempting to get my own financial house in order, and writing about it. In the next few money/investment posts I’ll be referring to sharks, monkeys, and ostriches. Might as well explain what I mean.
You are a heartless sociopath, or close to it. This makes you potentially the best kind of investor, but also the most dangerous (to both yourself and others). You view money as primarily an abstraction, and are able to make cold rational calculations and decisions without getting emotionally involved. You are prone to both gaining and losing large fortunes quickly. With training, you are able to clearly evaluate risk and make good financial decisions (low risk, high potential gain). However you do like making big bets and nobody wins all the time.
You are clever, but not as clever as you think you are. You are good at creating investment systems and strategies but bad at consistently following through on them. Investing is so much fun for you (at least when you are winning) that it’s hard not to meddle and “improve” your system. You are prone to both excessive enthusiasm and wild panic, and thus often find yourself buying high and selling low. You vacillate between “money as a game” and “money is real” and thus underestimate your tolerance for risk and market fluctuations. The investment history of a typical monkey might look something like this.
You would prefer to not think about money, investments, or how you will fund your later years. You feel ambivalent about accumulating money, and conversations about investing stress you out. Can someone else just deal with it? You may sensibly pick a wise fiduciary to manage your investments and do very well. On the other hand you might get snookered by a Bernie Madoff type. Ultimately you have good instincts about investing, and also have the capacity to follow an investment strategy with discipline. The hard part is thinking about it long enough to get started.
Investment personality aside, I think the same basic strategy works for most people who aren’t born rich (and yes I realize that term is relative — I’m referring to the poor, working, and middle classes in the U.S.). The basic plan:
- consolidate all high-interest debt and pay it off as quickly as possible with no less than 20% of your income
- save at least 10% of your income via automated transfers into savings and/or investment accounts (“pay yourself first“)
- keep some of your savings in an “emergency cash” fund to cover at least a few months of expenses
- allocate some % of your savings stream into “dream” accounts (travel, toys, gifts, etc.) and/or to charitable causes
- invest the remainder of your savings stream in low-fee investment vehicles (like exchange traded funds), diversified with fixed %’s into categories that fluctuate independently (stocks, bonds, commodities, gold, real estate), weighted more heavily towards less volatile categories like government bonds (depending on your age), rebalancing periodically
The last bullet point is incredibly dense and probably makes no sense unless you already understand it. I unpack it here in this post (and I highly recommend the Robbins book mentioned in same post, for both novice and seasoned investors).
How to Deal with Your Weaknesses
As a monkey, I’ve been a happier investor since I realized I don’t have much tolerance for giant fluctuations in my net worth. Since this realization I’ve invested more conservatively, and it better fits my personality.
I’m lucky to have an ostrich as a partner. If we discuss major financial decisions we’re much better off than my typical “leaping without looking very carefully” approach. The hurdle for Kia was getting clear about why she should invest in the first place. Like many people (including myself) she can’t really visualize retiring, and thus had a hard time thinking about “saving for retirement.” The cold fact of the matter is that even if you don’t want to retire, you might be forced to, or people may no longer want to pay money for what you have to offer at age 65. Yet you could easily live for another 30 years. Longevity variability aside, having a portfolio that pays you passive income allows you to do the work you want to do, regardless of if anyone is willing to pay you for that work.
But what should the shark do? The main shark pitfall is losing everything on “all in” bets. So don’t go all in. Follow a diversified portfolio strategy with most of your savings, and limit your high-risk bets to a limited %. This is a good strategy for monkeys too.
Next Up …
I’ll write at least two more posts on this topic in the coming months, including:
How To Create an Automated Trading Prompt System with Google Sheets
I’ll create and share a public Google Sheet that calls current market data from both Google Finance and Yahoo Finance, and discuss some of the simple valuation formulas I’m using. [Link]
How To Invest a Lump Sum
If you have cash but don’t yet have a diversified portfolio, should you buy in all at once at your % allocations, or “limp in” buying cheaper categories first? How do you know if a general category (stocks, bonds, gold, etc.) is cheap? [Link]