Determining Your Investment Style

What kind of investor are you? Are you a swing-for-the-fences type, or are you content hitting singles and doubles, racking up slow and steady gains? Or do you prefer to sit in the stands, chatting with your companions and occasionally cheering your home team on?

Before you start investing, you should determine your investment style. There are two major variables in figuring out your investment style – your risk tolerance and the amount of time you can dedicate to investing.

Risk.
How comfortable will you be if you invest in something in which the price changes every day – sometimes not the way you want it to change? There are various degrees of risk across the investment spectrum, from government bonds, which are considered risk-free as they are guaranteed by the government, to commodities, options and FX, where you can lose all of your money.

You need to consider how comfortable you will be seeing your investment decrease in the near term while you wait for it to increase over the long term. Although stocks have historically increased in price over the past two centuries, there have been some pretty bad periods. Without counting dividends, your equity investments could have lost almost 80% of their value had you bought stocks at the high in 1929 before the crash. You could have lost 40% had you bought at the high in 1972. Heck, in October of 1987 the Dow decreased 25% – in just one day! The important thing to remember about stocks, though, is that you don’t lose anything until you sell them. For example, if you didn’t panic and sell your stocks in October of 1987, you did quite nicely as the market rebounded in subsequent years. That’s why, when you’re investing in the stock market, you need to think long-term. Don’t invest any money in stocks that you’ll need in the short term.

Government bonds provide guaranteed returns, and bank savings accounts are insured through the banks, but only up to $100,000 on deposit. For FX or stock investing, there is no similar guarantee or insurance that the ride will be smooth or that every investment will make you money, but if you invest with good traders or buy good businesses, the odds are in your favor. Just remember that the safest road isn’t always the best one. At the Golden Goose, we believe that the biggest risk is not taking enough risk!!

It should also be said that you can learn to increase your risk tolerance for investing in markets like the FOREX. Once you see the kind of returns you can generate over time, you’ll come to realize that it really doesn’t matter if your account drops or rises over the course of a few hours or days or weeks or even months, as long at the end of the term you are up.

Time.

Time is another important element of your investing profile. How much time do you want to spend on investing? How active do you want to be in the management of your money? Do you want to spend 15 minutes a year on it? Then maybe you should consider using the Passive Strategies detailed below. Or maybe you have eight hours a week, in which case you might enjoy researching companies and pouring over financial statements to pick individual stocks.

Another time factor is: When do you need the money? Whether you need the money next week or in a hundred years will dramatically affect what investment vehicle you decide to use. Although stocks have great long-term returns, the returns over periods of three years or less can be downright scary. Luckily for you, as you have now determined your goals and how much money you will need to get there, you also know how soon you will need the money and will be able to make the appropriate choices when you are ready to invest.