One of the problems many investors face is that they don’t really know themselves. If you want to find better success as an investor, you need to take some time to understand your wants and needs.
When you invest without self-knowledge, and without a plan, you’re setting yourself up for failure.
Know Your Goals
First of all, you need to know what you want to accomplish with your investment portfolio. The desired end result has a lot to do with with the plan you create. While it can sometimes be enough to start early and invest often, other goals require a different approach.
The way you invest if you’re building a retirement nest egg that you won’t need for 30 years is different than if you’re trying to fund your child’s college education in 10 years, or if you want to build an income portfolio to use within the next five to seven years.
Think about your goals, and why you plan to invest. The more you know about what you hope to accomplish, and the time frame you have, the better off you’ll be in the long run.
Understand Your Risk Tolerance
Another important trait to understand about yourself is your risk tolerance. Everyone has a different level of risk tolerance, and it’s important to know where you stand. There are two elements to risk tolerance:
- Financial: This is the numbers part of the equation. Look at your finances. What can you afford to lose? How much money can you put away right now? You need to know how your finances would handle a worst-case scenario. Can you afford to put $500 a month into an IRA, thereby tying the money up? If you pick the wrong dividend stock, and payouts are slashed and the value tanks, can you absorb the loss? You need to know this information before making your investing plan.
- Emotional: Don’t forget your emotional risk tolerance. If you have a high emotional tolerance for risk, you might put your finances in danger by making ill-advised and risky decisions. Understanding your appetite for excitement and risk is vital, and you need to recognize this issue and rein in your exuberance. On the other hand, it can also be a problem if you are too risk-averse. A super-low emotional risk tolerance can lead you to invest only in “safe” assets, and prevent your wealth from growing. If you have this issue, you might need to consider index funds or other acceptable-risk investments.
Look at your risk tolerance, and understand what you can handle, as well as where you might need to make changes in your behavior. This can be a big help in boosting your investing success.
Make a Plan
Can you stick with a plan? Do your best to create a plan based on what you know about yourself and your tendencies. Then, stick to it. You might need to make a few tweaks now and again, or rebalance your portfolio — but in the long run, following a plan based on what you understand about yourself offers your best chance for success.
Have you taken the time to get to know yourself in terms of investing?
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