Investor, know your market temperament

Question: I loved tech stocks in the 90’s, but waited too late to get out. But now, I really think small caps are ready to take off, especially foreign. Do you agree?

Answer: I haven’t a clue. Neither do you. The difference is that one of us knows it.

Small cap stocks can be wonderful investments when bought at the right time and the right reason. A hunch about the future is the wrong reason, and may be the wrong time.

The success of an investment program depends on two factors: the investment and the investor. Both have to work together to have a successful outcome.

The best "investment" is a disciplined portfolio with a predetermined strategy that you, or your portfolio manager follows. Since many do not have access to exceptional portfolio managers, a broad based selection of mutual funds is the next best choice.

The contribution an investor makes to the success of an investment program is two-fold: first, make a good investment selection. Second, stay out of the way.

Guess what? This is easier said than done!

Meir Statman, professor of finance at the Leavey School of Business at Santa Clara University and Vincent Wood have co-authored a study called Investment Temperament. In the study, they applied psychological testing methods to investor behavior.

They found that investors typically fall into one of four "investment temperaments." These investment temperaments can be helpful in predicting how a person will behave when selecting an investment, and when reacting during a variety of financial circumstances.

Sounds to me like you are an "Artisan." What do you think?

Guardians. The authors describe Guardians as the cornerstones of society, serving and preserving the most important social institutions. They use their talents to manage families, communities, and institutions. Guardians are cautious, loyal, and disciplined. They follow the rules and cooperate with others.

Artisans. Artisans excel in the arts, including athletic, military, political, and mechanical and industrial arts. In business, they love the "art of the deal," wanting to be where the action is. They can be impulsive and competitive, and they believe in luck. Above all, they resist being tied down or confined and would rather not wait, or save, or live for tomorrow.

Idealists. Passionately concerned with personal growth and development, idealists strive to discover who they are and how they can improve. And they want to help others make the same journey. Idealists are drawn to working with people through education, social services, journalism, or the ministry. They are gifted in helping others find their way in life.

Rationals. These rigorously logical and fiercely independent thinkers tackle problems in various areas, from organic systems such as plants and animals to mechanical systems such as railroads and computers, and social systems such as families, companies, and governments. Rationals are skeptical of all ideas, even their own. They often seem cold and distant, but this is because of their absorbed concentration.

First, pick the right investment. Then stick with it.

Identifying the strengths and weaknesses of your investment temperament can help you anticipate problems and get outside help before you find out that your own worst enemy …is you.