How to Become an Investor - Local Wealth Professionals

Most investors start out as “savers”.  Many savers never really become investors.  They stay savers.  There is nothing wrong with this, except if they don’t admit it to themselves.

Ok, so how do I know if I am a saver or an Investor?

A saver is someone who accumulates money as savings.  In other words, they “save up”, either to buy something specific, or maybe for a rainy day… and sometimes that rainy-day fund morphs (in their minds) into a retirement fund.  They want to know their capital is safe and they usually prefer to get a fixed, known return on their money when they “invest” it, rather than subjecting it to any market risks.

Investors are people who understand their money can function like an employee for them.  They want it to work for them, for it to be productive and grow.  Also, they understand how business works.  Rule one in business is that one takes calculated risks every day.  Maybe it is taking a chance on a new employee, or a customer, or supplier in the expectation that they will work out and the business arrangement will be successful – that it will make money.

When an investor buys a security (or an investment property or a business, etc.) they are putting money down on an asset, which they hope will give them a favorable return on invested capital.  In most cases, there is no guarantee that the investment will work out.  But the investor knows that if they take no risk they will revert to “saver” mode and be required to settle for low guaranteed returns…

So, who transitions from being a saver to an investor?  It is the person who comes to realize that the saying “no risk, no reward” applies to them.  They recognize that to have an opportunity of a higher return, it usually requires that they make a bet on a strategy, be it buying a stock or a property or a business.

A smart investor is very conscious of risk.  They ask lots of questions, and do research.  The opportunity is often obvious.  The potential pitfalls are often harder to find and assess.  This process is called “due diligence”.  Many would be investors get impatient, or succumb to perceived urgency to act, and skip over this process – or only do a superficial investigation.  When that happens what was supposed to be a “calculated risk” becomes more of a “craps shoot” – a gamble.  Not everyone really wants to become an investor.

What about all the people out there who own stocks, bonds and mutual funds – are they investors or are they savers?  The answer emerges from asking another set of questions: do they understand the investments they are making?  Can they quantify the risks involved with all of them?  Do they know how those investments are being bought, ie do they understand the fees they are paying to buy and sell the investments?  Or are they delegating the whole process to someone else without really understanding the process?

The person who takes the trouble to understand what they are buying, why they are buying it and what possible risks are associated with their investment is a conscious investor.  However, the person who knows nothing about what is going on apart from wanting to “make money on their money” is probably a saver – with a saver mentality:  they really cannot tolerate short term losses well – and consequently should stick mainly to guaranteed investments.  Unless our saver wants to take the trouble to learn more about the investing process and the risks associated with it, they will probably remain a saver and will never become an investor – and that should be okay.

At this point the issue may be with their “advisor” more than with them, themselves:  do advisors recognize savers and treat them with the respect they deserve?  Are all advisors honest with their clients and do they direct them to investments appropriate for their risk profiles?  That is a question for another day.

Tom Dusmet
Author: Tom Dusmet

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