All men should strive
to learn before they die
what they are running from, and to, and why.

~James Thurber

Have you found the investment process very frustrating? Maybe you've been trying to pick individual stocks, implement the recommendations of your advisor, or follow a passive strategy on your own. Any one of these investment strategies could work. Those who spend a lot of time debating which is the best one miss the more important question: Which one will work for you?

Regular readers know that I'm a fan of the movie The Princess Bride, so I can't resist quoting one of my favourite exchanges. This one involves the characters Vizzini and Fezzik:

Vizzini: Finish him. Finish him – your way.

Fezzik: Oh, good. My way. Thank you Vezzini. Which way's my way?

Figuring out which way is your way is a good first step to mastering the investing process.

Know Thyself

A couple of weeks ago I asked: Can a Personality Quiz Change Your Life? I suppose that depends on how well you already know yourself and grasp your underlying strengths and weaknesses. “Know thyself” was inscribed by the Ancient Greeks at Delphi, so the concept isn't exactly revolutionary.

Still, it can be easy to underestimate the importance of self-discovery. A fundamental understanding of what makes us tick can have a real impact on our sense of well-being and success in every part of our lives. Asking someone to perform an action of which they are inherently incapable means setting them up for failure.

Likewise, telling a risk averse investor how to play the hottest penny stocks probably won't help any more than advising someone with a much higher risk tolerance to set their asset allocation at 50% stocks and 50% bonds and forget about it. Investing is like any other activity in life: we need to figure out how to make it work for us.

7 Investment Questions

In a recent study, researchers asked people who had validated their MBTI personality type the following series of questions about investing and risk tolerance in an effort to see if there were any discernible patterns:

1. Which would you prefer for your investment portfolio:

a) To reduce risk and sacrifice return
b) To increase return taking more risk

2. How would you prefer to invest?

a) Through a mutual fund
b) In stocks directly
c) Through a financial advisor

3. Rank your interest in financial/investment issues:

(2 Cents: I'm assuming there was some type of 5-point scale from “Not Interested” to “Very Interested” involved here.)

4. How would you assess your appetite for financial risk?

Low, Medium, or High

5. What is your investment priority?

a) To provide security
b) To build wealth

6. What is your level of anxiety about making proper investment choices?

7. What does money mean to you? (Rank the following options.)

a) Security for old age
b) Power and ability to influence events
c) Ability to improve the quality of life of those I care about
d) Ability to support my own aspirations and growth

Personality type had more effect on answers to some of these questions than others. It had “the highest impact on risk tolerance, the financial planning process and level of interest in investment issues and less impact on actual choice of investments such as stocks and bonds.” For example, my type (INFJ) is not supposed to be interested in managing their own portfolios. That is clearly not the case for me, but INFJs are also supposed to be highly risk averse and that fits very well.

How Can You Use this Information?

Answering these questions is a good place to start if you're interested in improving your investment performance and reducing your stress level. Once you've got a handle on your basic views surrounding money and investing, you can audit your current investments or set up an appropriate approach to use in the future.

Do your investments reflect your financial values? If you're more interested in security than building globs of wealth, it makes sense to evaluate your investments on that basis. Are you taking too much risk? Maybe you've been trying to manage your own investments, but you're finding it stressful, time-consuming and frustrating. Perhaps it's time to consider getting some outside help. Not everyone finds investing interesting, and that's OK.

On the other hand, maybe you've been with the same advisor for years and you've learned a lot more about investing since you signed on with him or her. If you're wondering whether you could do better, you can have a frank discussion with your advisor and/or try your hand at investing some of your money yourself. Just make sure you don't make any drastic moves all at once.

Finding the right approach is an exercise in trial and error. It takes time to learn about all of the options available to you and decide which ones might work. The key is to look at all of your options first and narrow them down to a few that seem to suit your personality best. Your investing methodology can (should?) be as unique as you are.

You'll always be able to find people who claim that their way is best. They may be right, but their way may not work for you. Finding the investment approach that works for you is the first step to success – whatever success means to you.

Did your answers to the questionnaire clarify anything for you? Do you think your investment approach is congruent with your personality?

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