When it comes to structuring your investment portfolio, the most important factor might not even be the portfolio itself: it’s all about you. Before you even consider an investing strategy, select stocks to populate your portfolio, or add money to your investing account, you should stop and think about the basics. That’s right, the very basics.
What kind of an investor will you be?
Will you be hesitant to make changes to your strategy often, or will you be willing to buy and sell with the market’s ups and downs?
Do you have any big financial goals or deadlines you need to make?
How old are you?
All of these questions may seem secondary in the grand scheme of your investment plan. In fact, you’re probably thinking “well, none of my answers to those questions even matter if I haven’t already picked good stocks to make my portfolio succeed.” But, think again. Knowing your limits should help you pick your stocks – not the other way around. Most investors who try to learn their limits after picking their stocks discover this lesson the hard way: when it comes to your money, it is better to be proactive than retroactive.
So, that brings us to the main question: How well do you know yourself?
You can start learning your limits by considering your own “hard data” – facts about yourself that are objective or numerical. For example, most investors start by considering their own ages. Let’s say that you are 30 years old right now. Many younger investors are more willing to take risks, because retirement is far off. Therefore, if they make a mistake with their investments, they will have time in the future to make up for their losses. But, if you were 60 right now and intended to retire soon, you may be less inclined to make riskier investments.
Next, your current income, wealth, and career mobility are big factors in investing. With higher current income or existing wealth, you may feel more comfortable starting out with a substantial investing portfolio. On the other hand, for those just starting out with a lower income or less existing wealth, you may prefer to ease into the investing world and get a feel for things before you throw all of your savings into your portfolio. Secondly, if you are currently in a job that could yield good promotions every few years, you may feel more confident about investing your money instead of saving it for a rainy day. But, if you are in a job or working for a company where you cannot see yourself indefinitely, or where your opportunities for promotion are scarce, you may start with a less risky investment portfolio. This will allow you to save your money in the case that you switch job opportunities in the near future.
Lastly in terms of hard data, you may want to consider your financial obligations. This category could include factors like having a family or buying a house (or even saving to buy one). With these different financial obligations in mind, you will probably end up choosing different strategies that will best help you reach your goals. People who are looking for steady growth on their investments over time might pick one line of investments, while those looking for quick growth to reach their financial obligations might pick another.
After considering all of the relevant numerical information you can find about yourself, you should then turn to consider your emotional information. How much do you trust yourself to make the right decision? Are you a person who likes to make little changes every so often, or a person who can set out on a path and not change anything until you arrive at your destination? This kind of emotional intelligence will help teach you about your own risk tolerance. When your money is on the line, knowing how you will react to volatility is definitely important.
So, before you even start researching your investments, take a little bit of time to get to know the investor in you. Set some end goals and learn where your limits are. Only then, once you have asked yourself all of the tough questions, will you truly be prepared to start off on your investing journey!