Free AI web copilot to create summaries, insights and extended knowledge, download it at here

Abstract

are more about the emotional reaction than the profit or loss — although obviously they’d prefer to make money.Many investment guides try to stifle this trait, and caution the excitable investor to be more dispassionate. In my view, this is a mistake. My husband is an excitable investor, and we’ve learned instead to harness his instincts.Instead of picking stocks like you’re playing the lottery, an excitable investor can do well with anticipating and riding the trends of major indexes. They are very good at sentiment-based investing. From a trading standpoint, using options can lead to extremely high profits while minimizing losses. This increases the positive emotions while decreasing the negative emotions.<h1 id="f2d9">Are you cautious or aggressive?</h1>The cautious investor is one who hates to lose any money. They’d rather make a known small profit than risk losing money to possibly make a great profit. These investors do best with stocks that provide steady dividends. Stocks that pay more than 3% dividends are considered income stocks, and you can easily find well-managed, secure companies that are paying higher than that rate.Rather than searching for good rates, find good companies, and buy them when a temporary drop in stock price increases the dividend rate. An excellent source of good companies with a history of good dividends can be found in the <a href="https://www.marketbeat.com/dividends/aristocrats/">Dividend Aristocrats</a>. If investing in individual stocks still feels too risky for you, there’s a Dividend Aristocrat ETF, to allow you to invest in all of them at once.I’m a cautious investor. My portfolio of dividend stocks started at around 5%, and I took advantage of the huge price dips in 2020 to boost the overall return even higher. More importantly to me, however, is that none of the stocks has lost money. In fact, if any stock rises too much in value, I sell it, so that I can reinvest that money.Aggressive investors are at the other extreme. They look at the stock market as a gladiatorial competition, where they will win and the losers will be left bleeding on the sands. They are willing to accept very large losses or temporary setbacks in order to ultimately win huge profits.One way that aggressive investors can do quite well is by specializing in a specific sector of the market, for example, technology stocks, or energy stocks. By understanding the underlying dynamics of that sector at a deep level, they are able to capitalize on the natural ebbs and flows of the market.Another way that aggressive investors can harness their natural instincts is by finding arbitrage opportunities. Especially if they are also dispassionate, they can create computer models to identify imbalances in the market and take advantage of them. This sort of trading tends to require split-second buying and selling decisions,

Options

and is best left to computers.My husband is an aggressive investor. He loses money on most of his trades. But the occasional home run more than makes up for the losses. He trades a much smaller portion of our overall portfolio than I do, but generates a comparable amount of income on average.<h1 id="a704">Are you optimistic or pessimistic?</h1>Optimists tend to believe that stock prices will continue to rise, sectors that have fallen out of favor will become popular again, and that record highs herald even higher highs to come. They are well-suited for buy-and-hold behavior. If the stock pays a dividend, they enroll in the stock’s dividend reinvestment program. After all, why would you sell your stock, when the price is going to continue going up?Warren Buffett is the classic example of an optimistic investor. He’s famously quoted as saying his favorite holding period for stocks is “forever”.Optimists can be quite successful by identifying sectors that have public sentiment against them, and finding the jewels within that sector. For example, when oil prices plummeted recently, as an optimist, I did quite well with mid-level energy stocks that warehoused fuel. The entire energy sector took a nose dive, but those companies were still being paid, regardless of whether or not the oil companies could sell that fuel.Pessimists, on the other hand, are often predicting the next market correction or bear market. They think that overpriced stocks are due for a comeuppance, and that the dogs of the Dow will continue to underperform their sectors.Pessimists can do extremely well for themselves by short selling stocks that have high investor sentiment but poor fundamentals. They can also use option trades to predict that stocks which hit record highs will have a retrenchment within the next 30 days.This is the investment I spoke of in the introduction, where I made excellent profits, but felt empty inside. I’m not a pessimist, and consistently betting against companies’ good fortunes felt like a betrayal of my world view. I stopped placing these types of trades when I realized I actually felt worse when I made money.<h1 id="3991">Conclusion</h1>By understanding where your personality falls on the dispassionate/excitable spectrum, the cautious/aggressive spectrum, and the optimistic/pessimistic spectrum, you’ll be better able to devise an investment strategy in keeping with your own personality. If you’re new to investing, it will help you discover an index or ETF that matches both your personality and your long-term investment goals.Investing according to your personality will help you follow your investment rules, and not fall prey to some of the more common investment mistakes, such as failing to diversify, holding a losing position, or allowing your emotion to sway your investment decisions.</article></body>

What’s Your Investor Personality? Discover Your Best Way to Invest

Graphic by author. Photo by MayoFi on Unsplash.

If you’ve had any conversations with an investment professional, they’ve no doubt asked you to fill out some paperwork designed to determine your psychological profile. By this, they mean, what investment timeframe are you looking at, and how willing are you to take risks?

In my personal view, that is not much of a psychological profile. It minimizes the chance that the professional will get angry phone calls from investors who are unhappy with their results. It doesn’t speak to what makes your heart sing as an investor. It doesn’t pinpoint the style of investing that gets you coming back, again and again, for the kind of emotional payoff that the market can give, in addition to the financial payoffs.

I’ve been investing for over 40 years. In that time, I’ve had some dramatic profits that left me feeling empty, and some modest profits that have filled me with joy. To be a successful long-term investor, you need to find the style of investment that will produce both profits and joy. That style depends on your individual psychology.

The types of psychology that I’m talking about are:

Dispassionate
Excitable
Aggressive
Cautious
Optimistic
Pessimistic

How passionate are you?

The dispassionate investor is personified by the quantitative analyst. They have spreadsheets and formulas addressing every possible investment. If the formula says invest, they invest. If it says sell, they sell.

Dispassionate traders do extremely well in environments where there is a statistical element to the trade. For example, you can set up criteria for in/out vertical options spreads that have a 70% chance of making $.55 for every dollar invested. Invest in enough of these, and you will end up making money. The dispassionate trader will not be thrown off course by the 30% of losing trades.

I am a dispassionate investor, and will happily spend hours each month plugging numbers into formulas. I find satisfaction in my calculations, and trust the system that I use to provide the return I am looking for.

At the other extreme, the excitable investor is one whose attitude toward investing tends to be similar to a gambler. Many if not most day traders are excitable investors. They “bet” on stocks about which they have a hunch or “good feeling”. When the stock goes up, they’re ecstatic. When the stock goes down, they’re crushed. They actually care more about the emotional reaction than the profit or loss — although obviously they’d prefer to make money.

Many investment guides try to stifle this trait, and caution the excitable investor to be more dispassionate. In my view, this is a mistake. My husband is an excitable investor, and we’ve learned instead to harness his instincts.

Instead of picking stocks like you’re playing the lottery, an excitable investor can do well with anticipating and riding the trends of major indexes. They are very good at sentiment-based investing. From a trading standpoint, using options can lead to extremely high profits while minimizing losses. This increases the positive emotions while decreasing the negative emotions.

Are you cautious or aggressive?

The cautious investor is one who hates to lose any money. They’d rather make a known small profit than risk losing money to possibly make a great profit. These investors do best with stocks that provide steady dividends. Stocks that pay more than 3% dividends are considered income stocks, and you can easily find well-managed, secure companies that are paying higher than that rate.

Rather than searching for good rates, find good companies, and buy them when a temporary drop in stock price increases the dividend rate. An excellent source of good companies with a history of good dividends can be found in the Dividend Aristocrats. If investing in individual stocks still feels too risky for you, there’s a Dividend Aristocrat ETF, to allow you to invest in all of them at once.

I’m a cautious investor. My portfolio of dividend stocks started at around 5%, and I took advantage of the huge price dips in 2020 to boost the overall return even higher. More importantly to me, however, is that none of the stocks has lost money. In fact, if any stock rises too much in value, I sell it, so that I can reinvest that money.

Aggressive investors are at the other extreme. They look at the stock market as a gladiatorial competition, where they will win and the losers will be left bleeding on the sands. They are willing to accept very large losses or temporary setbacks in order to ultimately win huge profits.

One way that aggressive investors can do quite well is by specializing in a specific sector of the market, for example, technology stocks, or energy stocks. By understanding the underlying dynamics of that sector at a deep level, they are able to capitalize on the natural ebbs and flows of the market.

Another way that aggressive investors can harness their natural instincts is by finding arbitrage opportunities. Especially if they are also dispassionate, they can create computer models to identify imbalances in the market and take advantage of them. This sort of trading tends to require split-second buying and selling decisions, and is best left to computers.

My husband is an aggressive investor. He loses money on most of his trades. But the occasional home run more than makes up for the losses. He trades a much smaller portion of our overall portfolio than I do, but generates a comparable amount of income on average.

Are you optimistic or pessimistic?

Optimists tend to believe that stock prices will continue to rise, sectors that have fallen out of favor will become popular again, and that record highs herald even higher highs to come. They are well-suited for buy-and-hold behavior. If the stock pays a dividend, they enroll in the stock’s dividend reinvestment program. After all, why would you sell your stock, when the price is going to continue going up?

Warren Buffett is the classic example of an optimistic investor. He’s famously quoted as saying his favorite holding period for stocks is “forever”.

Optimists can be quite successful by identifying sectors that have public sentiment against them, and finding the jewels within that sector. For example, when oil prices plummeted recently, as an optimist, I did quite well with mid-level energy stocks that warehoused fuel. The entire energy sector took a nose dive, but those companies were still being paid, regardless of whether or not the oil companies could sell that fuel.

Pessimists, on the other hand, are often predicting the next market correction or bear market. They think that overpriced stocks are due for a comeuppance, and that the dogs of the Dow will continue to underperform their sectors.

Pessimists can do extremely well for themselves by short selling stocks that have high investor sentiment but poor fundamentals. They can also use option trades to predict that stocks which hit record highs will have a retrenchment within the next 30 days.

This is the investment I spoke of in the introduction, where I made excellent profits, but felt empty inside. I’m not a pessimist, and consistently betting against companies’ good fortunes felt like a betrayal of my world view. I stopped placing these types of trades when I realized I actually felt worse when I made money.

Conclusion

By understanding where your personality falls on the dispassionate/excitable spectrum, the cautious/aggressive spectrum, and the optimistic/pessimistic spectrum, you’ll be better able to devise an investment strategy in keeping with your own personality. If you’re new to investing, it will help you discover an index or ETF that matches both your personality and your long-term investment goals.

Investing according to your personality will help you follow your investment rules, and not fall prey to some of the more common investment mistakes, such as failing to diversify, holding a losing position, or allowing your emotion to sway your investment decisions.