I was reading an article the other day and it used a reference that I think applies perfectly to discovering what type of investor you are. When it comes to making financial decisions, there are really two types of people, and when we are in times of high market volatility, the difference between the two becomes more obvious. With the recent chaos in the stock market, now is a good time to take a look in the mirror and determine whether you're a local or a tourist?
Tourists are usually only in one place for a short time, they travel in and out of places quickly. Maybe one month it’s the beach, the next a desert, then a busy city. They are always changing scenery, exploring new places, and looking for the next ‘hot spot’. In the investing world this equates to someone who is making decisions based on a short-term outlook. If you are only going to be invested in something, whether its a stock, bond, mutual fund, etc., for a short period of time, then you are really more of a trader or speculative investor. Always chasing the next ‘best thing’.
In contrast to a tourist, a local is someone who has been in the area for a long time. They are familiar with their surroundings, they make calculated decisions based on their experience and knowledge. Locals plant roots and work toward their long-term goals, like buying a home, having a family and living comfortably. Locals are long-term investors. They stay put through the good and the bad, and make decisions that are in their overall goals.
Locals constantly invest in themselves and their future. Locals will increase contributions and try to find opportunities when the weather or market changes. They have a set of goals and investment objectives and stays the course without constant changes. Tourists leave at the first sign of rain and in the investing world stop contributing all together or even sell and pull their funds out.
During market highs and market lows we often see locals tempted to cross over to the tourist mentality. If you are constantly consuming financial media you may get this idea as well. So the next time you find yourself feeling a bit of FOMO or wondering if you should get out of the stock market during a downturn, ask yourself; am I a tourist or a local?