What type of investor are you? This is a serious question.  Are you an investor that can ignore the news and remained focused on your long term goals? Or are you an investor that worries about where the market is headed? As the market plummets and the bad news continues to bombard us, it is easy to let our emotions get the best of us.  For many, the natural reaction is to feel like we need to do something. But, before you do anything, it may be important to consider how our emotions can hurt us more than help us when it comes to investing.

(click to enlarge)

It is unsettling to read the news and see all of those red numbers glaring at you (especially when the 'Sage of Omaha' feels the way he does right now).  It is a scary time.  But, it is always important to take a deep breath and get a better view of the situation.

What Kind of Investor Are You?

When  we keep it all in perspective, we realize that we (the U.S.) have faced many recessions in our history.  And even though it may 'FEEL' different, the reality is that economies ebb and flow.  There are good times, there are bad times.  However, when you get 'perspective' you realize that the 1) markets do rebound and 2) that even in recessionary periods, the market performs just fine in these periods.

Historical Recession Chart

But make no mistake about it...when you see numbers like this, it can be very frightening as investors. It makes you feel like it will never end.

Declines From Peak to Trough

So, we have a choice on we are to react (emotionally) regarding the news of the day.  Are we going to get caught up in the bad market news of today or are we going to focus on the future and control the variables that we can?  

When we look at the market in the context of history, we realize that markets go up and they do go down (in fact they are  up more than they are down). The chart below shows the returns of the S&P 500 over a long period of time (1929) and various return periods.  This is to show that returns are there for the investor who remains disciplined.  

The Disciplined Investor

Best - Worst Returns

Up and Down Periods

So as you can see, it is the investor that is able to take a step back and in the words of Carl Richards of The Behavior Gap forget about what is happening in the market and go do something...breath, relax...go running, etc. It will come back.  

So what type of investor are you? Are you an Indifferent Investor? A Concerned Investor? A Worried Investor? Or a Disciplined Investor?  

The charts below illustrates what happens if you are Indifferent, Concerned, Worried or Disciplined. The idea is that if you were to invest $250,000 in the market starting in 1973 (why 1973? it was a terrible time in the market) and invested for 10 years (1982).  

The Indifferent Investor invest $250,000 at the start of 1973. Every month this investor puts an additional $500 every month.  He is indifferent to what is going on in the market and quite frankly doesn't care.  He invest and is indifferent.  

The Concerned Investor is another story. She invest $250,000 at the start of 1973.  After the terrible returns of 1973-1974, she stops adding $500 a month.  She is concerned and does not want to feel like she is throwing her money away.

The Worried Investor is WORRIED.  He invest $250,000 at the start of 1973.  After two years he has an upset stomach. He can't sleep for fear of what is going to happen next. In 1975, he switches his investment objective to a Bond allocation.  

The Disciplined Investor invest $250,000 with determined to stay invested and meet her portfolios objective.  In 1975, with all the bad news, terrible returns, she know that this is an incredible opportunity. She increases her monthly savings from $500 to $700.  She knows that the time to be greedy is when everyone is fearful.  

In the words of Paul Harvey--you know the rest of the story.  It is discipline that pays in the end.  

(Please keep in mind that the charts below represent only ONE asset category-the S&P 500.  Obviously, the most prudent investment strategy is based on broad asset allocation using a structured, passive strategy).

The Disciplined Investor

The Disciplined Investor Difference

So what kind of investor are you? Or better, what kind of investor do you want to become?

Download-What Type of Investor Are You?

What Type of Investor Are You?