Build your money for life – Who are you as an investor? – Part 3

Throughout this series of Retirement Planning articles we’ve focused on eight variables that directly affect the timing of retirement and what returns are needed to see you into retirement. This week I want to help you tackle one of the most difficult but fundamentally important questions of investing -that is, who you are as an investor?

Why do you need to know who you are as an investor? Well it’s critical that you understand how you can match your retirement goals to your investing skill level, risk tolerance, and capital base. Once you determine who you are, you’ll be able to understand where you are at, where you want to go, and identify the skills and knowledge you will need in order to meet your retirement objectives. The answers to these questions will put into perspective what strategies could provide the type of returns you seek.

I’ve come to realise that there are 5 stages of an individual’s investment progression. I’ve done my best to put each stage into a definable category so you can relate and understand who or where you are as an investor in the realm of investing approaches. My 5 stages of investment progression are:

Let me briefly explain the characteristics of each investor profile in broad terms. I have done my best to recognise the core qualities, values and range of potential returns on offer from each category. I am aware that. Whilst this exercise is subjective and it’s impossible to specifically define every individual, investment class and potential range of returns within a group, breaking the whole ambit of investing approaches down into categories does assist an investor to profile what’s available, where they fit in, where they may wish to go and what may be required to get there. Some investors may knowingly or unknowingly overlap categories with or without the necessary skills to be in a particular category. Yet others may be content with the category they are in and see no need to move to ‘faster’ categories.

Crawling

• An investor that chooses to invest indirectly via managed funds or managed super funds or chooses to use the service of a financial planner or investment adviser.
• An investor who chooses to have no exposure to the market but rather invests cash in a bank account or in a fixed interest account.
• The skills required at this level are minimal.
• A crawler could endure a 50% drawdown if the market falls that far.
  
• Can start with as little as your first pay check or a few thousand dollars.
• Most walkers are classified as passive investors.
• Spends as little as 1 hour every 6 months reviewing performance and filing paper work.
• Crawlers can invest 100% of investment capital into crawling strategies.

Crawler	Average Type Drawdowns	Average Type Performance
	< 0 to – 20%	> 0 to 5%

*The numbers indicate Average Type Performance that could be achieved for each category. The Average Type Performance and Average Type Drawdown range should only be used as a guide as performance and drawdown will change from strategy to strategy. The Average Type Performance should not be used as a year on year measure, rather, it should be calculated over a 5+ year period to take market cycles into context. The Average Type Performance indicated in the table is a compounded per annum figure. The Average Type Drawdown is an acceptable range within the particular category.

Walking

• A walker is a long term near passive investor seeking returns consistent with long term investing.
• Could be relatively inexperienced but is pursuing education.
• Could be experienced and has a focus on buying shares for the long term.
• Walkers focus on fundamentally sound ‘blue chip’ shares.
• Earning dividends is a major consideration.
• A walker could endure a 50% drawdown if the market falls that far.
  
• Walkers start with as little as $10,000 and manage money up into the millions.
• Most walkers are classified as passive investors.
• Might spend an hour or two once a month reviewing performance, etc.
• Walkers can invest 100% of investment capital into walking strategies.

Walker	Average Type Drawdowns	Average Type Performance
	< 0 to – 20%	> 0 to 10%

*The numbers indicate Average Type Performance that could be achieved for each category. The Average Type Performance and Average Type Drawdown range should only be used as a guide as performance and drawdown will change from strategy to strategy. The Average Type Performance should not be used as a year on year measure, rather, it should be calculated over a 5+ year period to take market cycles into context. The Average Type Performance indicated in the table is a compounded per annum figure. The Average Type Drawdown is an acceptable range within the particular category.

Jogging

• Jogging is akin to medium term trading with NO leverage.
• Joggers are DIY investors and make their own trading decisions.
• Joggers like to turn capital over in the market by buying and selling.
• Joggers like to take profits from trends rather than riding through long term up and down movement and may even step aside from the market altogether for periods of time.
• Joggers invest to create compounding rather than relying on capital growth in a single stock.
• Joggers accept that it is more active and thus takes more effort.
• Joggers accept that they need a buy/ sell strategy.
• A jogger should limit their drawdown to less than the market if it falls by 50%.
• Joggers are required to have psychological skills to manage money through the ups/ downs.
• Joggers understand that they may need a minimum of $50,000 to make jogging work due to minimum brokerage costs.
• Joggers can invest 100% of investment capital into jogging strategies.

Jogger	Average Type Drawdowns	Average Type Performance
	< 0 to – 30%	> 0 to 20%

*The numbers indicate Average Type Performance that could be achieved for each category. The Average Type Performance and Average Type Drawdown range should only be used as a guide as performance and drawdown will change from strategy to strategy. The Average Type Performance should not be used as a year on year measure, rather, it should be calculated over a 5+ year period to take market cycles into context. The Average Type Performance indicated in the table is a compounded per annum figure. The Average Type Drawdown is an acceptable range within the particular category.

Running

• Runners may utilise leverage for their investing through a margin loan.
• A runner could be a longer time leveraged investor or a short term trader.
• The risks increase exponentially with the introduction of leverage.
• The necessary strategy and psychology skills become more advanced.
• Short selling could also be implemented.
• CFDs could be used to magnify returns through leverage..
• A runner could endure more than 50% drawdown if the market falls that far.
  
• Start with as little as $20,000.
• Runners should not invest more than 25% of their total investment capital into running strategies.

Runner	Average Type Drawdowns	Average Type Performance
	< 0 to – 100%	> 0 to 40%

*The numbers indicate Average Type Performance that could be achieved for each category. The Average Type Performance and Average Type Drawdown range should only be used as a guide as performance and drawdown will change from strategy to strategy. The Average Type Performance should not be used as a year on year measure, rather, it should be calculated over a 5+ year period to take market cycles into context. The Average Type Performance indicated in the table is a compounded per annum figure. The Average Type Drawdown is an acceptable range within the particular category.

Sprinting

• The sprinter uses options, CFDs, currencies (FX), futures, option on futures coupled with a multitude of trading strategies for either directional or non-directional trading.
• Sprinters are extremely active sometimes trading intra-day.
• Sprinters may trade local and international markets at all hours of the day and night.
• Sprinting strategies involve leverage, maybe lots of it.
• Short selling is used.
• Sprinters accept that their investing strategies are very high effort, high skill level and higher risk than the other categories.
• Sprinters may push their position sizes to the hilt in order to accelerate returns.
• Sprinters can start with as little as $20,000 and know that they could experience large drawdowns.
• A sprinter could endure far more than 50% drawdown if the market falls that far.
  
• As a sprinter you should not invest more than 15% of your total investment capital into a sprinting strategy.

Sprinter	Average Type Drawdowns	Average Type Performance
	< 0 to – 100%	> 0 to 40%

*The numbers indicate Average Type Performance that could be achieved for each category. The Average Type Performance and Average Type Drawdown range should only be used as a guide as performance and drawdown will change from strategy to strategy. The Average Type Performance should not be used as a year on year measure, rather, it should be calculated over a 5+ year period to take market cycles into context. The Average Type Performance indicated in the table is a compounded per annum figure. The Average Type Drawdown is an acceptable range within the particular category.

5 levels of investing – 5 levels of return

From the above descriptions you can now see that there are 5 levels of investor. You should also be able to recognise which type of investor you are and perhaps even the type of investor you want to become. You may even straddle categories with the strategies you pursue.

The benefits of understanding who you are as an investor are immeasurable. Each level comes with its own potential return, which, in turn, comes with its own skill level, time & effort requirement, capital requirement, and risk tolerance. As we progress up the levels each these become greater. A crawling strategy, the simplest, requires little effort, and delivers the least potential return. At the top end, sprinting strategies require a lot of effort and skill and can deliver the greatest potential returns. We’ll look closer at this next week.

Don’t become just another failed retiree

Many people begin their journey having been sold some ‘fantastic sounding’ proposition without first understanding who they are as an investor and where that strategy might fit into the full ambit of strategies available. What they are totally unaware of is what strategy is best aligned with their level of competence, risk tolerance and investing style. If you are not aligned with your chosen strategy in these key areas it is highly unlikely you’ll be able to make it work and it’s more unlikely that you’ll reach any long term financial goals. Make sense?

Remember this is all about identifying who you are, feeling comfortable with that recognition, and aligning ‘you’ and chosen strategies with your retirement goals and aspirations.

The next and most critical component of this exercise is to either accept who you are as an investor and the type of returns on offer or pursue an elevated level of competence which has the potential for greater returns. You should now know that this next level will require sacrifice, education, time and risk tolerance.

Next week we’re going to a little more about returns.