Defining who you are as an investor is an important first step in putting yourself on the path to getting what you want out of your investments. There are many ways to describe what kind of an investor you are, but the categories we’re going to focus on are:
a) How you have done so far
b) How well you understand risk
c) How much planning you do
The first factor –
how well or how poorly you’ve done so far – will tell you where you stand in relation to other investors. Why is this important? Because it will motivate you to make the changes that will improve your skills, improve your results, and make you more money. Knowing how you have done, and comparing it to how much better you could be doing, tells you what your
investing potential is.
The second factor –
how well you understand risk – is important because investing is always about risk: how to measure it, and how to control it. Investors who don’t understand risk, or don’t pay enough attention to it, tend to be chronic under-performers. The most successful investors – the ones who consistently out-perform the market – are the ones who take the time to figure out how much risk they’re taking before they buy or sell.
The third factor –
how much planning you do – will have a direct and significant impact on your investing results. Studies have shown that investors who spend even a small amount of time on planning, do
twice as well as investors who do no planning. These studies also show that investors who take the time to write a thorough plan (what the studies call ‘serious planners’) do
three times as well as non-planners. And finally, investors who not only create a serious plan, but also regularly review and update it, get results that are more than
4 times as good as non-planners.
Why not use the same methods, tools, and techniques that the most successful investors use? By far the most important tool that top-performing investors use is the Investment Policy Statement. By taking the time to sit down and write out a simple plan, you can invest like the big money players and find out what it’s like to be at the top of the performance charts.
