What kind of investor are you—or should you be? Do you invest according to your age? What’s your ideal asset allocation?
If you’re an investor, a speculator, or you’re considering getting into the market, you want to invest with knowledge. That includes knowledge about the stock market as a whole, certain stocks in particular, and you as an investor.
Continue reading for several stock market questions designed to help you understand yourself as an investor as well as your current and prospective investments.
Stock Market Questions to Consider
We’ve written 25 stock market questions and organized them into five exercises that will help you become a more thoughtful and successful investor.
Exercise #1: What Kind of Investor Are You?
The stock market questions in this exercise are based on the concepts in The Intelligent Investor by Benjamin Graham, A Random Walk Down Wall Street by academic economist and former Wall Street portfolio manager Burton G. Malkiel, and The Warren Buffett Way by investment professional Robert G. Hagstrom. They will help you define what kind of investor you are or should be.
- Are you currently an investor or a speculator? Investment is an “operation that, through extensive analysis, provides an adequate return and safety of principal.” Investors always consider the underlying value of what they’re buying.
- Have you ever speculated before? What did you do, and what was the result?
- How much time are you willing to spend on investment?
- What are your expectations of returns, relative to the market average?
- How would you rate your risk tolerance—high, low, or moderate?
- Are you a set-it-and-forget-it type, or do you like to tinker? Which do you think is the best investment strategy for you and why?
- Have you ever committed the mistake of following Mr. Market—buying when the market was rising and selling as it was falling? What was your thinking during that time?
- How many stocks have you invested in, and what was your rationale for choosing these stocks?
- Of the stocks in your portfolio, choose one. How highly would you rate this company from a quantitative standpoint (that is, in terms of the company’s market value and finances)? For example, this could involve calculating the company’s ROE or finding its profit margins.
- How highly would you rate this company from a qualitative standpoint (that is, in terms of the company’s management and business model)? For instance, this might involve assessing the management’s transparency in past letters to shareholders and the simplicity of its business model.
- In light of your previous answers, do you think this company is a promising investment? Why or why not?
- What kind of investor should you be? Why would you not want to be a different kind of investor?
Exercise #2: Invest According to Your Age
The stock market questions in this exercise are based on the concepts in A Random Walk Down Wall Street by Burton G. Malkiel. Consider how your age and investing are related.
- Why is it important, in general, to hold onto investments for the long run?
- Considering your age and tolerance for risk, what might be an optimal allocation for you?
- Now imagine ten years have passed. How might you “rebalance” your allocation to reflect your new age?
Exercise #3: Know the Current Environment & Prepare for Fluctuations
The stock market questions in this exercise are based on the concepts in The Intelligent Investor by Benjamin Graham and A Random Walk Down Wall Street by Burton G. Malkiel.
- What are some current investment fads that you might be wary of? List two or three, and then explain why they seem suspect to you.
- What strategies might you use to avoid getting caught up in a bubble? If you were affected by the dot-com or housing bubbles, you might draw on your experience here.
- How will you prepare yourself for future fluctuations in your investments?
Exercise #4: Determine Your Ideal Asset Allocation
The stock market questions in this exercise are based on the concepts in The Little Book of Common Sense Investing by John C. Bogle. Bogle, the founder of the Vanguard Group, argues that your ideal asset allocation between stocks and bonds depends on two factors: your financial position and your degree of risk aversion. In this exercise, evaluate these two factors to determine your ideal portfolio.
- Which financial liabilities do you have looming in the future (for example, mortgages or retirement costs)? Write down these liabilities and their specific costs.
- To determine your risk aversion, imagine that the stock market dipped and your portfolio just dropped $1,000. Describe your initial reaction to this loss—for example, are you inclined to withdraw your funds to prevent further losses? Or are you unphased by this short-term loss?
- In light of your previous answers, what do you think your portfolio’s ideal ratio of stock to bonds is (Bogle recommends anywhere from 80-20 for young investors with low risk aversion to 25-75 for mid- to late-life investors who value stability)? Why do you think this ratio is ideal?
Exercise #5: Find and Research a Potential Investment
The stock market questions in this exercise are based on the concepts in One Up on Wall Street by legendary investor Peter Lynch. Practice using Lynch’s strategy for finding and researching potential investments.
- Think back to the last few days: Did you encounter any companies whose product or service piqued your interest? Do any of these companies have one or more of Lynch’s preferred traits: Does it have a mundane name or business, exist in a no-growth industry, or is it a spinoff of an existing company? You don’t have to do in-depth research for this exercise; simply jot down your thoughts about the company that seems most promising to you.
- Now, reflect on what type of stock it is: a slow-growth, dependable, fast-growth, cycle, underdog, or hidden-treasure company. Again, you don’t have to investigate this in detail for this exercise, but simply use your existing knowledge and a few minutes of online research to place the stock as one of these types.
- Next, do a quick online search for the company name and try to find answers to some of Lynch’s questions about the stock: Is the company buying back shares? Has the company recently diversified? Does the company have any special assets? Does it have a large inventory? Note any findings you make below.
- Finally, write down a brief speech or paragraph detailing why the company is a good investment opportunity.
