Are you an investor? Although this might seem like a simple question, the answer isn't so straightforward. You could look up a definition, compare yourself against a set of criteria -- I do this, this and this, therefore I am an investor -- and decide you are indeed an investor. That's one way of approaching the question. Another way is to ask some fundamental questions about your financial decisions, what's informing your strategy and how you're putting a plan into place. In other words, think about attitude, aptitude and action.
There are a multitude of personal finance and investing books, websites and blogs that pledge to show you how to spend less, save more, make better investment decisions and retire well. However, the straightforward concept of what it means to be an investor, and particularly on how to avoid some of the emotional and psychological barriers to creating wealth, was best explained in Napoleon Hill's 1937 Think and Grow Rich.
Hill interviewed more than 500 of the era's most successful Americans and came to a number of seminal conclusions on the key attributes that led people to great financial success. Interestingly, Hill's book does not provide investment advice or identify specific investment skills -- action -- but instead focuses on aptitude and attitude. He speaks plainly about desire, faith, auto-suggestion, specialized knowledge and imagination, and the direct correlation between these personal attributes and the ability to amass wealth.
"There is a difference between WISHING for a thing and being READY to receive it. No one is ready for a thing, until he believes he can acquire it. The state of mind must be BELIEF, not mere hope or wish."
Attitude and aptitude
Being successful as an investor means believing you are an investor. Although there are many people whose net worth is influenced by the capital markets, many still do not see themselves as investors. Take for example a recent survey of defined contribution (DC) retirement plan members by State Street Global Advisors (SSgA). SSgA polled more than 2,000 participants -- people in the United States, United Kingdom and Ireland -- that were contributing capital to invest for retirement to provide "insights into the unique needs of participants in different countries."
In addition to the fact that most respondents were concerned about their ability to amass enough capital for retirement and manage their investments effectively, the survey found that many individuals did not even perceive themselves as investors. According to SSgA, "the latest DC survey highlights again that DC members principally view themselves as savers, not investors."
Achieving long-term financial goals depends on two distinct but complimentary processes: accumulating capital for investment and achieving an appropriate return on that capital. The problem with identifying as a saver is that most savers are focused on capital preservation, while investors are focused on leveraging their capital to create wealth. Since many of the respondents considered themselves savers, it was not surprising that many were very conservative in their investment choices and were also reluctant to take on the additional risk to realize the higher returns necessary to achieve their retirement objectives.
To be successful, those investing for retirement must change their orientations from saver to investor, take advantage of the tools, education, and advice available to investors, and make investment choices that have the potential to fulfill their financial needs.
Action
It is clear that defined contribution plan members that are supplying capital for the expressed purpose of growing that capital for retirement should perceive themselves as investors. Yet there are others, whose original reason for investing was something other than the expectation of a financial return, who may be less clear on what they are doing constitutes investment or not.
Take the example of most homeowners. Their initial impetus for buying a house, such as family security, or a desire not to rent, may have been much more important than the eventual value increase of their capital contribution. However, regardless of their initial reason for buying the home, they are real estate investors whose wealth is now impacted by the health of the economy and the local real estate market. Since for many of these people the equity in their home is their single largest asset, it is imperative that they understand how the markets affect their investment and make decisions that maximize the performance of their asset. This means being comfortable with the idea of taking risks, and not letting risk become a barrier to action.
For investors, risk is not merely something to be managed and become comfortable with. In fact, appropriate risk should be regarded as a tool that can be leveraged to build wealth. It's required. Putting risk into action is a key differentiator between the saver and the investor.
There is nothing wrong with being a saver as opposed to being an investor per se but it is important to know how to distinguish between the two and know where you stand. Savers aspiring to be investors will have a difficult time generating the wealth necessary to reach their financial goals until they embrace calculated risk taking. If that sounds like you, a financial advisor with the Chartered Financial Analyst (CFA) designation can help you learn more about the risks and what's appropriate considering your circumstances.
If you're not quite sure, consider checking in with Napoleon Hill's Think and Grow Rich, and then speak with a CFA advisor. After all, he or she will have probably read it too.