Investor, Know Yourself

We're all subject to emotional and psychological pulls on our finances. Take this quiz to uncover the real reasons you invest the way you do.



Want to be a smarter investor? Get in touch with your feelings.

The usual advice tells us that we have to use reason, not emotion, when we make investment decisions. But even if we think we're being cold and analytical when we make a move, emotions are working under the surface in ways that we can't escape—and usually don't entirely understand.

If we better understand how we feel, how we think and what kind of personality we have, we get more insight into the forces that affect our investing behavior. And that might make us smarter investors—or at least invest in ways that don't give us heartache.

Here's a quiz to help you take a step back and evaluate what's going on inside your head.

1. What You're Prepared to Lose

The first question deals with how you balance risk and reward. Suppose that you could replace your current investment portfolio. The new portfolio has a 50-50 chance to increase by 50% your standard of living during your lifetime. However, the new portfolio also has a 50-50 chance to reduce by X% your standard of living during your lifetime.

What is the maximum X% reduction in standard of living you are willing to accept?

1. 5% 2. 10% 3. 15% 4. 20% 5. 25%

6. 30% 7. 35% 8. 40% 9. 45% 10. 50%

Think about your answer this way: The lower the number you chose, the more you think the pain of a decline outweighs the joy of an increase. For instance, people who are willing to accept a maximum 25% reduction are saying, in effect, that the potential pain is twice as important as the potential joy.

If you are even more cautious than that, you're not alone. Surveys show that, on average, Americans are willing to accept a maximum reduction of approximately 12.5%—meaning pain outweighs joy by 4 to 1. Breaking that average down further, men are more willing to tolerate risk than women, and the young are more willing to tolerate risk than the old.

What's the lesson here? Look carefully at the balance you chose in your answer above and ask yourself if it's really helping you. Fear of loss magnifies risk, driving us out of stocks, as at the peak of the financial crisis in 2008. Exuberance blinds us to risk, rushing us into stocks, as at the peak of the technology boom in 1999.

If you're very reluctant to take risks, you might want to consider a bigger position in stocks to make up for your cautious tendencies. If you're more aggressive, perhaps think more closely about bonds or other more conservative investments.

2. Do Bad Choices Bug You?

"Whenever I make a choice, I try to get information about how the other alternatives turned out and feel bad if another alternative has done better than the alternative I have chosen."


This statement:

1. Describes me well

2. Describes me somewhat

3. Does not describe me at all


Surveys show that, on average, women have a higher propensity for regret than men, and the young have a higher propensity for regret than the old.

If you tend to feel bad about decisions you've made, remember one important fact: Regret is a powerful teacher, but sometimes it teaches the wrong lesson.

All too often, highly regretful people shy away from everything that didn't work out for them, for whatever reason. You should analyze your failures and ask yourself: Was your choice really stupid, or were you merely unlucky? Sometimes we lose money in a stock because the company isn't as good as it looks. But sometimes stocks sink for reasons outside the company's control, and will rise later on.

Regret stupid choices and learn not to repeat them. But don't regret wise choices that turned out poorly, or else you could end up missing out on valuable opportunities. As Mark Twain said: "The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won't sit upon a cold stove lid, either."

3. Think You Can Beat the World?

Which statement best describes you:

1. I strongly believe that I can pick stocks that would earn higher-than-average returns.

2. I somewhat believe that I can pick stocks that would earn higher-than-average returns.

3. I don't believe that I can pick stocks that would earn higher-than-average returns.


Surveys show that, on average, men are more overconfident than women, and the young are more overconfident than the old. Overconfident investors are willing to take a lot of risk.

Overconfidence can be handy in some situations—like persuading a job interviewer you're the best among 400 applicants. But it can lead you to make poor choices when you're investing. You're likely to make excessive trades, for instance, and whittle away a portfolio you'll miss in retirement.

If you have confidence that you can beat the market, remember one simple fact: A consistent ability to earn higher-than-average returns is rare, and most investors who try to beat the market end up beaten by it. Find ways to tamp down your eagerness and make fewer trades. Look for stocks that you'll buy and hold for the long term, or buy a portfolio of mutual funds that take care of the trading for you.

4. Attention to Details

Would you describe yourself as organized, responsible and thorough? Would you say that you are always prepared, pay attention to details and follow a schedule?

1. Definitely

2. Somewhat

3. Not at all

This measures what psychologists call conscientiousness. In this context, it doesn't have anything to do with knowing right from wrong; it's about being attentive to details and planning. Conscientious people are ambitious, with high propensity for regret but low risk tolerance. Conscientiousness remains fairly stable as we age, but women tend to be more conscientious than men.

When it comes to managing money, conscientious people are good at saving, accumulating fatter portfolios than people with equal income but lower conscientiousness.

Are you conscientious? You are likely to save more than enough for retirement. But be sure to avoid going overboard. Don't let conscientiousness turn you into a miser, injuring your family and you. A financial adviser told me of a man who lived in a trailer, depriving his daughter of college education—only to leave her $3 million when he died.

Before you die, spend some money on yourself, your family and your community. Remember that, in the end, you cannot take your conscientious savings with you.

5. The Life of the Party

Would you describe yourself as enthusiastic, talkative and outgoing? Would you say you don't mind being the center of attention, that you feel comfortable around people, and that you tend to start conversations?


1. Definitely

2. Somewhat

3. Not at all

Extroverts, as psychologists call them, are the life of the party. They are overconfident, willing to tolerate risk and largely immune to regret. This combination of traits makes them good salespeople, whether selling products or themselves. But extroversion detracts from introspection and gets in the way of listening, as extroverts cannot cease talking.

If you're extroverted, recognize that some of your willingness to take risks in investing is probably rooted in your psychology—and not in a thoughtful assessment of risks and returns. Be sure to think twice about any move you make, and resist the urge to make excessive trades, which can do more harm than good.

And listen to the voice of regret, that stern and helpful teacher. Let investments that didn't pan out be a lesson, instead of a spur to try to recoup money as quickly as possible.

6. A Generous Spirit

Would you describe yourself as appreciative, generous and trusting? Would you say you sympathize with others' feelings, take time out for others and make people feel at ease?


1. Definitely

2. Somewhat

3. Not at all

Agreeableness is a mixed blessing when it comes to investing. Consider how this plays out with women, who are more agreeable than men. Women tend to trade less in financial markets than men—which is an advantage, since trading cuts into a portfolio more than it adds. But women also tend to hold lower-risk portfolios that build less wealth.

If you're agreeable, the lesson is to trade like a woman but invest like a man. Consider buying riskier issues that may generate big returns, but don't make a lot of moves with your holdings once you've got them.

Agreeable people would also do well to resist the naïveté that often accompanies agreeableness. Yes, the con artist offering high returns with low risk seems nice, but the pyramid scheme he is building will collapse your retirement portfolio.

7. A Vivid Imagination

Would you describe yourself as curious, imaginative and original? Would you say you have a vivid imagination, excellent ideas and the ability to understand things quickly?


1. Definitely

2. Somewhat

3. Not at all

People who rate highly on this question are known as "open"—intellectuals, more interested in ideas and inventions than in money, and easily bored by routine. Open people, like agreeable ones, are less ambitious than conscientious people and extroverts, and they are more trusting than conscientious people. Yet, unlike agreeable and conscientious people, open people are willing to take risk.

When it comes to money, openness can have serious downsides. Many open people spend their careers without thinking much about what they're accumulating in their pensions and defined-contribution savings plans. Many are surprised to find they have quite a bit piled up. Yet many often find, too late, that they still don't have enough, because they never paid attention to their investments and didn't build up enough wealth.

The lesson? Act more like a conscientious person—and pay closer attention to what's happening in your portfolio.

One strategy is to apply your natural inclinations to your finances. Don't think of investing as a dreary chore that will pull you away from creative pursuits. Instead, look at it as a puzzle or a machine, something whose mysteries you can examine and try to make sense of. (Just don't imagine you can beat the market consistently; there's no system that will get you great returns every time.)


8. A Worrywart?

Would you describe yourself as anxious, touchy and unstable? Would you say you are easily disturbed, irritated easily and worry about things?

1. Definitely

2. Somewhat

3. Not at all

If you rated yourself high here, you have a tendency toward neuroticism, and it's crucial to be aware of that when you go about investing. You may tell yourself you're objectively assessing risk when you make moves, or resist making moves. But more likely, your actions are due to fear and pessimism. And since you probably score low on conscientiousness, too, you probably aren't saving much, either—which exposes you to the dangers of little retirement income.

A good strategy is to turn to a financial adviser to design and enforce a portfolio for you. An adviser can calm you down when the market tanks and you feel compelled to dump your stocks. He or she can also impose rules to make sure you're making wise moves, such as making you wait a month between deciding to unload a lot of stocks and actually making the trade.

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