{"id":1652,"date":"2018-12-18T15:13:15","date_gmt":"2018-12-18T15:13:15","guid":{"rendered":"http:\/\/investspectrum.com\/uma\/?p=1652"},"modified":"2020-05-15T12:34:26","modified_gmt":"2020-05-15T12:34:26","slug":"know-yourself-the-four-investment-temperaments","status":"publish","type":"post","link":"https:\/\/investspectrum.com\/uma\/know-yourself-the-four-investment-temperaments\/","title":{"rendered":"Know Yourself: The Four Investment Temperaments"},"content":{"rendered":"<p style=\"text-align: justify;\">I recently read \u201cThe Four Temperaments\u201d by Rev. Conrad Hock, AngelusPress.org.\u00a0 In it the author describes in detail the good and bad traits of each of the four temperaments: choleric, sanguine, melancholic and phlegmatic.\u00a0 Everyone has a dominant temperament, and, in the book, you can take a simple test to find your own temperament.\u00a0 There are also many online sites that allow you to take a test to determine your temperament.\u00a0 Unlike personality, your temperament never changes with time!<\/p>\n<p style=\"text-align: justify;\"><a href=\"http:\/\/investspectrum.com\/uma\/wp-content\/uploads\/temperament-1.png\" target=\"_blank\" rel=\"noopener noreferrer\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-1662 size-medium\" src=\"http:\/\/investspectrum.com\/uma\/wp-content\/uploads\/temperament-1-300x300.png\" alt=\"\" width=\"300\" height=\"300\" srcset=\"https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/temperament-1-300x300.png 300w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/temperament-1-150x150.png 150w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/temperament-1-88x88.png 88w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/temperament-1.png 401w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/a><\/p>\n<p>The fact of the matter is we are all emotional.\u00a0 But we all react in different ways when presented with unintended consequences, surprises, conflict, decision-making etc. (both good and bad).\u00a0 I started working with clients and their investments back in the early 90\u2019s.\u00a0 It amazed me how clients reacted differently to the same 20% move higher or the same 20% move lower in the market, even when they had the same risk tolerance.\u00a0 Most of these reactions were based on perceived expectations correlated directly with their investment temperament.<\/p>\n<p style=\"text-align: justify;\">The chart below shows the emotional rollercoaster ride millions of investors go through from time to time, which may influence investment decision-making.\u00a0 In many cases the decisions investors make can be quite irrational and detrimental to their long-term portfolio goals.\u00a0 Many investors don\u2019t have the expertise and certainly not the time or focus needed to make proper investment decisions.<\/p>\n<p style=\"text-align: justify;\"><a href=\"http:\/\/investspectrum.com\/uma\/wp-content\/uploads\/RollerCoaster.jpg\" target=\"_blank\" rel=\"noopener noreferrer\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-1656 size-full\" src=\"http:\/\/investspectrum.com\/uma\/wp-content\/uploads\/RollerCoaster.jpg\" alt=\"\" width=\"700\" height=\"360\" srcset=\"https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/RollerCoaster.jpg 700w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/RollerCoaster-300x154.jpg 300w\" sizes=\"(max-width: 700px) 100vw, 700px\" \/><\/a>September 2015 edition of ICICIdirect Money Manager Magazine.\u00a0 Source: Credit Suisse<\/p>\n<p style=\"text-align: justify;\">Behavioral Finance is an amazing topic.\u00a0 There have been numerous books written and any Economics\/Finance major has taken at least one course on this subject.\u00a0 I won\u2019t turn this into a 50-page thesis, but I would like to explain four investment temperaments I have coined over the last 25 years.\u00a0 These observations include clients, prospects, family, friends and strangers.<\/p>\n<ul style=\"text-align: justify;\">\n<li><strong>Risk Seeker<\/strong> This type of investor wants to make as much money as possible, regardless of risk. This type wants to make make at least as much as the general stock market going up.\u00a0 On the way down they aren\u2019t happy, but they won\u2019t sell, knowing they will make back their portfolio losses and then some in the future.\u00a0 They are extremely confident individuals.\u00a0 A spin-off of the risk seeker is one that has the same objective, however their reaction during large drawdowns is different.\u00a0 They start to panic, even though they came in with a long-term game plan. They know the risks involved with investing aggressively, but eventually they will sell everything at the worst possible time.<\/li>\n<li><strong>Controlled Risk-Taker<\/strong> This type of investor wants to make all the money when the general market goes up but wants to lose very little during drawdowns. Much of their investment portfolio is in equity positions.\u00a0 These investors are typically well informed on what the general market is doing.\u00a0 Buy and hold won\u2019t work during periods of large drawdowns, so they employ active management in bad times.\u00a0 They will quickly reduce portfolio equity exposure at early signs of emotional pain.<\/li>\n<li><strong>Preservationist<\/strong> This type of investor wants to make money with much less risk than the stock market. They feel safer with bonds because they aren\u2019t as volatile.\u00a0 Many investors with this mentality either fear they will run out of money in their retirement years or they want to give it all to their children\/grandchildren.\u00a0 They simply want to be reassured that their principal is still there.\u00a0 Any growth is a positive.<\/li>\n<li><strong>Balancer<\/strong> This type of investor wants to make money in line with stock market returns, but they want downside protection. They know stocks are riskier than bonds and the next bear market will eventually come. They like being in a diversified stock\/bond\/alternative portfolio.<\/li>\n<\/ul>\n<p style=\"text-align: justify;\">In late October the S&amp;P 500 gave up all its gains for the year in just a few weeks (see chart below). From the close on October 3<sup>rd<\/sup> to the close on October 29<sup>th<\/sup>, the S&amp;P 500 fell 9.71%. The Nasdaq 100 Index fell 12.09%, led by one of its largest components, Amazon (AMZN), which fell 21.19%.<\/p>\n<p style=\"text-align: justify;\"><a href=\"http:\/\/investspectrum.com\/uma\/wp-content\/uploads\/SPSnapshot-1.png\" target=\"_blank\" rel=\"noopener noreferrer\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-1659 size-full\" src=\"http:\/\/investspectrum.com\/uma\/wp-content\/uploads\/SPSnapshot-1.png\" alt=\"\" width=\"1674\" height=\"762\" srcset=\"https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/SPSnapshot-1.png 1674w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/SPSnapshot-1-300x137.png 300w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/SPSnapshot-1-768x350.png 768w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/SPSnapshot-1-1024x466.png 1024w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/SPSnapshot-1-900x410.png 900w, https:\/\/investspectrum.com\/uma\/wp-content\/uploads\/SPSnapshot-1-1280x583.png 1280w\" sizes=\"(max-width: 1674px) 100vw, 1674px\" \/><\/a>Created with StockCharts.com.\u00a0 \u00a9 StockCharts.com, Inc.\u00a0 All Rights Reserved.<\/p>\n<p style=\"text-align: justify;\">The most common reactions I heard at the end of October were:<\/p>\n<pre style=\"text-align: justify;\">\u201cEverything is fine, it\u2019s time to buy more at a discount.\u201d\r\n\r\n\u201cOuch, that hurt. I don\u2019t know if I should sell or hold here.\u201d\r\n\r\n\u201cThis doesn\u2019t feel good, but at least my exposure was reduced, and I had a diversified portfolio, including bonds.\u201d\r\n\r\n\u201cIs this the start of the next Bear market?!?! Is my money safe???\u201d\r\n\r\n\u201cWe\u2019re still in a Bull market. I\u2019m diversified and this bump in the road is OK.\u201d\r\n\r\n\u201cI\u2019ve enjoyed this Bull market, but this is the second time this year I\u2019ve seen a 10% drop.\u00a0 I think it\u2019s time to be a little more defensive, unless the market has a good rally.\u201d<\/pre>\n<p style=\"text-align: justify;\">As stated before, you can see many different reactions to the same 10%+- move in the market.\u00a0 All these reactions are normal, depending on your temperament.\u00a0 At Spectrum Financial one of the first things we talk to prospects about is their risk\/reward profile.\u00a0 Investors must be honest with themselves when asked questions like:<\/p>\n<ul style=\"text-align: justify;\">\n<li>What is the biggest drawdown you could handle?<\/li>\n<li>What are your long-term goals? How long are you willing to invest with us to meet them?<\/li>\n<li>What Index(s) will you compare your portfolio to?<\/li>\n<li>Is your outlook generally optimistic or pessimistic concerning investing?<\/li>\n<li>Do you feel you are an aggressive, moderate or conservative investor?<\/li>\n<\/ul>\n<p style=\"text-align: justify;\">I tell prospects and clients all the time that there are no wrong answers to the above questions.\u00a0 If these questions are answered honestly, it\u2019s much easier to customize a client portfolio based on his\/her temperament so that expectations are met.\u00a0 Once allocated, we know we are doing a good job when we see a drawdown in the market like we saw this October and our clients are happy with their return based on their risk\/reward expectations.\u00a0 If a client calls disgruntled, in many cases they aren\u2019t as aggressive\/conservative as they thought they were.\u00a0 We can easily adjust portfolios accordingly.<\/p>\n<p style=\"text-align: justify;\">What type of investment temperament do you have?\u00a0 Call our office and let us explain our unique investment products and how they can be a great fit for your investment portfolio.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>I recently read \u201cThe Four Temperaments\u201d by Rev. Conrad Hock, AngelusPress.org.\u00a0 In it the author describes in detail the good and bad traits of each of the four temperaments: choleric, sanguine, melancholic and phlegmatic.\u00a0 Everyone has a dominant temperament, and, in the book, you can take a simple test to find your own temperament.\u00a0 There [&hellip;]<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[46,97],"class_list":["post-1652","post","type-post","status-publish","format-standard","hentry","category-market-research","tag-active-management","tag-temperament"],"_links":{"self":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/1652"}],"collection":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/comments?post=1652"}],"version-history":[{"count":8,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/1652\/revisions"}],"predecessor-version":[{"id":1960,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/posts\/1652\/revisions\/1960"}],"wp:attachment":[{"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/media?parent=1652"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/categories?post=1652"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/investspectrum.com\/uma\/wp-json\/wp\/v2\/tags?post=1652"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}