How to Recognize Your Investment Style
Although Wall Street considers an investor any person or business that buys an asset with the expectation of reaping a financial reward, investors can display the attributes of three different styles of market participants: savers, speculators, and investors.
The first step on the road to becoming a successful dividend investor consists of becoming a money saver. Whether you’ve been saving money for years or are just starting today, the fact is that you need to save more. After you become a saver, the question becomes whether you want to progress to speculating or investing to make your seed money grow.
Every investor starts out as a saver. After all, you have to have some money before you can invest it. Some people move past this stage to become speculators or investors, but others remain savers throughout their lives.
What separates the saver from the speculator or investor is risk. The saver’s main objective is capital preservation. After he’s squirreled away some money from his paycheck, he wants to guarantee the cash will be there when he needs it. To achieve his goals, he tends to invest in safe vehicles — bank accounts, CDs, and money market accounts — because of their low risk, safety, and liquidity.
Speculators attempt to capitalize on the market’s short-term price movements — volatility. Capital preservation is a low- or no-priority item. The speculator jumps into the market and puts his principle at significant risk in the hopes of scoring a big return quickly. Unlike investors, speculators really have no interest in how long a company will be in business — their sole focus is share price.
Volatility can best be described as the size and frequency of extreme price moves over short periods of time. High volatility means an asset’s price can experience dramatic moves up or down, and low volatility describes moves of less than 5 percent.
Speculating demands a high risk tolerance because you can easily lose money. Over the long-term, the stock market climbs higher. But over the short-term, asset markets can be extremely volatile.
Investors are in the stock market for the long haul, seeking both capital preservation and appreciation. As such, they’re willing to take more risk than savers but approach their investments more carefully than speculators. Following are the three actions that define investors:
They have long-term financial goals — several years rather than several months, days, or hours.
They plan to hold long-term investments, holding an investment vehicle for at least five years.
They do extensive research because they plan on holding their shares for five years or more and want to invest in fundamentally sound companies.
Because of the volatile nature of most financial vehicles, you can never be sure of selling them at a profit when you need the cash. If the stock market suffers a major downturn, even conservative investments can experience significant price drops. However, if you give your investments many years to grow, even if the market suffers a downturn, a portfolio with stable, dividend-paying stocks will be worth more than when you started.