With today’s economic uncertainty and market volatility, it’s important to understand the emotions that drive your investing decisions. Whether it’s greed, fear, optimism or something else, knowing what motivates you can help you avoid making mistakes.
Or, as Warren Buffett puts it, “Only when you combine sound intellect with emotional discipline do you get rational behavior.”
It takes all types to make the market run, but some approaches are more likely to lead to long-term success than others. Ask yourself which of these mindsets is most like yours:
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The Gambler
The gambler is usually looking to get rich quick or with little effort. For example, the odds of winning the grand prize in Powerball are 1 in 292,201,338; there’s no mathematical justification for buying a ticket. And yet, somebody’s going to win — and it could be you. So you play. That’s gambling.
In the world of options trading, most people are gamblers. Hoping that one big win will change their standard of living, they tend to put too much of their net worth behind their trades. They don’t pay attention to probability, and they don’t work out the odds.
If you gamble in the stock market, you might get lucky once in a while, but in the end, there’s a strong risk of losing.
The Speculator
Speculating involves taking a calculated risk with an uncertain outcome. It can be fine now and then, in the same way that going to a casino might be fun once in a while. But if it starts to consume you and you’re spending money that you can’t afford to lose, then it becomes a problem. You should thoroughly understand what you’re getting into and be prepared to lose all the money invested.
For most people, most of the time, that means speculating is inappropriate. Mark Twain says it this way: “There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.”
The Investor
Investing is, of course, very different from gambling or speculating. It involves a process: learning fundamentals, doing some research and having confidence in a company’s financial details.
A careful investor makes decisions based on sound information, not hope or emotion.
Here’s another Buffett quote: In 2006, he told shareholders, “You have to be able to play out your hand under all circumstances. But if you can play out your hand, and you’ve got the right facts, and you reason by yourself, and you let the market serve you and not instruct you, you can't miss.”
That means a smart investor doesn’t just look at a price and say, “OK, that must be what the company is worth.” He estimates the actual value of the company based on his research, or the research of a trusted financial professional.
Investing does involve risk, including the potential loss of principal, since no strategy can guarantee a profit, and few protect against loss in periods of declining values. The key is to not get emotionally involved. An investor asks, “Can I make a good decision today to buy this asset based on sound information?” If the answer is yes, he moves forward.
The Risk Manager
As a person approaches or enters retirement, his thinking has to shift. Accumulating assets is no longer the goal; converting assets to income is what’s important.
Risk tolerance should be a factor for investors of all ages, but for those in or near retirement, it must be a primary focus. With little or no time to recover, a large loss can destroy your nest egg.
The risk manager thinks about what can be controlled in retirement ‐ and that’s certainly not the markets. It’s a matter of what portion of retirement assets should be in market-based assets (stocks, bonds, mutual funds, etc.) and how much should be in alternative assets (indexed annuities, real estate, commodities, etc.). Volatility is the enemy; diversification is the risk manager’s friend.
Did you spot yourself in any of the above investment approaches? Maybe you’re a mix of two or three, or even all four.
The trick is to be self-aware whenever you’re making a money move. Ask yourself each time, “Am I being a gambler, a speculator, an investor or a risk manager?” You just might save yourself from making a retirement-wrecking mistake.
Kim Franke-Folstad contributed to this article.
-
Why is My First Medicare Bill So High?Your first Medicare bill may be higher than expected for several reasons. If your premiums aren't taken out of your Social Security benefit, the bill can be huge.
-
11 Unforgettable Road Trips to Take in RetirementMore than a travel trend, the road trip is a quintessential American tradition, with millions of us taking them each year. Here's a guide to helping you choose your next adventure.
-
I'm a Financial Professional: Here Are Four Ways You Can Use Debt to Build WealthUsing debt strategically, such as for homeownership, education and more, can lead to greater financial stability and growth.
-
Five Key Wake-Up Calls for Ambitious Business Owners, From a Biz SpecialistYour personal financial plan needs to include a formal exit strategy for your business, or you could be in trouble.
-
I'm a Retirement Psychologist: Here's Why Doing What You 'Ought' in Retirement Beats Doing Whatever You WantTrue retirement freedom isn't about simply doing whatever you want, but about finding purpose and direction through commitments that align with your deepest values and allow you to contribute meaningfully.
-
Tactical Roth Conversions: Why 2025-2028 Is a Critical Window for RetireesThe One Big Beautiful Bill (OBBB) extended today's low tax brackets, but they may not last. Here's how smart planning now can prevent costly tax surprises later.
-
Ready to Retire? It's Not Too Late to Convert to a Roth IRAMillions of Americans are turning 65 this year. If you're retiring soon, don't dismiss the idea of a Roth conversion — it could still be a smart move even now.
-
9 Warren Buffett Quotes for Investors to Live ByWarren Buffett transformed Berkshire Hathaway from a struggling textile firm to a sprawling conglomerate and investment vehicle. Here's how he did it.
-
I'm a Financial Adviser: Three Things You Will Wish You Did Before the Fed Cuts Interest RatesWith potential interest rate cuts on the horizon, you might want to lock in today's higher yields and consider adjusting your asset allocation.
-
Simple Ways to Save on Back-to-School Shopping This YearSet a budget and stick to it, scour the house for what you already have, decorate backpacks and lunch boxes with your kids and consider buying some items during holiday sales.
