I have twin boys, fraternal, who are 10 years old. One is a saver and the other a spender. My eldest (by a minute) has saved $400 while his brother has a mere $90. My youngest told me the other day he wanted to buy a Kindle on Kijiji for $80 because he could afford it whereas his brother decided he was going to wait until we had our garage sale to determine whether he wanted to spend any money to buy one. Both are athletic and love to trash talk. My frugal son will wager conservative amounts on games whereas the other refuses to risk any of his money on a game of chance.
Each of us, even those raised in the same environment, will have a unique money style. Identifying your money temperament is critically important to determine the sort of money decisions you should make in your life. If you are a saver, you may not want to put your capital at risk in an investment. You may only want to continually add to that savings year over year. If you are a spender, you may have nothing to invest and if you do happen to inherit some money, you may be more comfortable with risk because having savings is not as important to you. If you have some money to invest, it is likely a good idea to determine your money style before choosing an investment.
My husband once worked with a fellow named Carlo. Carlo invested $5,000 with a broker in the late 80s and asked the broker to buy Dell stock. Every day he checked the stock price and would fret and panic if it went down or he thought it might go down. Every day he called his broker to ask his advice on whether to hold or sell. Every day he lost at least two hours of his day focusing on his investment and worrying about what might or might not happen. After about 30 days he sold it all and decided never to invest in the stock market again. I am sure his broker was relieved.
I started buying real estate with investors in 2003. It did not take long to notice that of the 20 investors in that project, some had a stomach for the risk of the investment and others did not. The plan had a three year timeline yet some of the investors would call me every week for an update and it was obvious they were losing sleep. When a healthy profit was paid out inside of three years, some were happy, some were disappointed, and some were just relieved to have their money back in the bank where they knew it was safe.
Over the years I have met the following investor types:
- The conservative: This person needs to keep her money in cash in the bank or in GICs or savings bonds. Otherwise she worries about losing her capital. Her goal is capital preservation above all else and the amount of interest she earns is almost irrelevant. She is uncomfortable with any degree of risk that has any possibility of decreasing the amount of money she has saved.
- The seasoned investor: This person is knowledgeable about various types of investment and has been investing his money for many years. He is comfortable taking some risk with his money provided he understands that risk and feels he can evaluate and assess the nature of the risk and the possible returns and the possible outcomes. He may invest in long standing public companies, in REITs, or in private rental real estate properties. He generally will have an advisor with whom he consults and will generally follow that person’s advice.
- The investor in a hurry: This person wants to get rich quick. He believes in investments that are too good to be true. He is constantly disappointed by the failure of his investments and his loss of money but he is incapable of changing the way he invests the next time.
- The entrepreneur: She is comfortable with risk and runs her own successful business. She evaluates an investment opportunity based on her business experience and her assessment of the character and competence of the person running the investment. She will often invest in other small businesses or projects that she understands due to her experience running her own business. She wants something she has some control over in some capacity.
There are many types of investments. For your own personal peace of mind, you should determine what is most important to you in making an investment before you consider putting any of your money at risk. It might be the potential rate of return on project completion; perhaps it is the safety of your principal investment. It could be that you know the person who is investing the money and trust that person. Maybe you want an income from your investment to top up your existing income.
Once you determine your primary objective for investing and you assess your personal tolerance for risk, you can evaluate possible investments to determine if they meet your criteria. If you match your personal money style to the investment, you will likely sleep easy no matter what happens.