August 4, 2009, 5:00 am

When To Change Your Investor Profile

by: The Financial Blogger    Category: Investment, Market and Risk
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multiple-facesA human being is a weird creature. When he sees a bear in front of him, he wants to run and hide. This is actually one of the very first survival reflexes we developed back in prehistoric times; running and hiding when faced with a dangerous situation. So we would think that once hidden, one would be happy that the danger is far away… nope. The very same individual who just ran away from his predator, once he feels safe, will lookup to see what is happening outside. Worst than that; he will actually go out again if he thinks he sees an opportunity (attack the beast from behind and have a nice meal for dinner).

Well this is actually what is happening right now with many investors; they were afraid of the bear so they ran and hid. Now that they feel courageous again, they want to go out and tame the bull… ignoring completely the bear chasing them a moment ago.

A regular investor (you, me, the guy sitting in front of you while you are reading this blog) will go through an emotional cycle every market fluctuation. As we all have a different risk tolerance level, one must sell his holdings as soon as he hears tell of a bear in the forest, the other will wait until he sees the bear upon him. In both cases, they will be tempted to sell; to run and hide.

When to change your investor profile?

During the past 9 months, several clients called me to change their investor profile since they were losing money and they didn’t want to avoid losing even more. They asked me to sell their stock and wait until the storm stops. I rationalized with all of them and only one client insisted. This person actually lost 40K and is now locked in Certificates of Deposit at 3.50% – 4% for the rest of his life. Unfortunately, he will never recover his losses ( no money back…) unless he lives until the age of 120 😉

Determining your investor profile is a crucial step before investing. It is important that you seriously take the time to answer each question asked in order to have the right profile that suits your goals and risk tolerance.

Once it is set, you should keep the same investor profile unless…

– Your financial situation changes (you inherit, retirement, job loss, after a market drop once your investments have recovered their losses), etc.).

– You have new projects (buying a house, investing for your kids’ education, stop working, starting a business, etc).

– Your investments will serve other purposes (you need to withdraw your money faster than expected).

You will always have 1 investor profile

An investor profile should reflect your personality; your capacity of handling the market pressure. Therefore, you should only have one investor profile at a specific time. However, it is normal to have different accounts invested differently, due to different time horizons.

For example, you may have your retirement account with an aggressive profile (20 year plan) and your savings investment as 100% secured since you are buying a house in 6 months.

Back to my bear story…

While I have never encountered a real bear, I heard several time that if you play “dead”, completely immobilized and do nothing (passive patience), you have much better chance of survival than others who unfortunately fleed from or fought the bear. Well I can guarantee you have much better chance to see your money recover if you do not sell your stock during a bear market!

image source: Mark Combes

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Comments

TFB, great post. I agree with everything you’ve said except for “after a market drop once your investments have recovered their losses.” I don’t think an investor should ever change their profile in response to what has happened in the market. As you mentioned in all your other examples, profiles should only change based upon life events.

[…] Today, The Financial Blogger talks about the #1 biggest mistake investors make, emotional investing, in his article When To Change Your Investor Profile. […]

by: The Financial Blogger | August 4th, 2009 (9:41 pm)

Jacob,
sometimes, people truly realizes their risk tolerance when they actually loses money. The key is to not change it during the crisis but after in order to get a chance to recuperate… and have a second thought!