Which type of investor are you?

0
1620
Grayson Rainier, Marketing Manager,
M&G Investments

Just as there are many ways to classify different types of personalities, there are also various ways of classifying, or profiling, investors. The aim isn’t to put people into boxes, but rather to explore the collective characteristics of different investor types, and to shed some light on the strengths and potential weaknesses of each approach. Recognising the type you most closely resemble will hopefully help you avoid the pitfalls of this type and be more successful in reaching your investment goals.  

Risk: The common denominator

The level of risk associated with investments is largely dependent on the type of assets held within your portfolio (such as equities or cash).

All asset classes have different risk/return profiles, and deciding which to invest in should largely depend on fundamental factors, such as investment objectives and time horizon. In practice, however, some investors base this decision on their attitude towards risk and not necessarily on their fundamental investment goals. In other words, sentiment is driving their choice.

For example, you might be relatively young but conservative and risk-averse, and consequently, allocate very little of your investment portfolio to equities, which are considered among the ‘most risky’ asset classes. While on the other extreme, you could be well into your retirement years with very little cash reserves to fall back on, but because you love taking chances, you end up overexposing your investment portfolio to equities. Neither of these asset allocation decisions are the most appropriate. Basing your asset allocation solely on your attitude to risk can be problematic.

This is one of the reasons why financial advisers will often ask first-time clients to fill out a questionnaire that considers their entire financial position, in addition to their willingness and ability to take risk. This helps with structuring a richer, more nuanced financial plan that is tailor-made to specific investment needs.

Over the years, we’ve identified four broad types of investors based on their approach to investment risk.

Type 1: The Avoider

The Avoider is someone who likely hasn’t started investing yet. They might think that investing is too complicated and feel overwhelmed by the vast amount of investment options out there. They might think it takes too much time to start investing, or that something could go wrong, and they could end up losing their money. The Avoider stands out from the other investor profiles in that investment risk is not the primary driver behind their investment decisions, or lack thereof. Instead, their lack of knowledge and fear of losing money often prevent them from making the time to get started. Fortunately, there is plenty of information available online on how to get started, or a financial adviser can help get the process going.

Type 2: The Risk Taker

The Risk Taker approach to investing is much the same as they approach life. They tend to be less long-term oriented and more focused on short-term gains. They thrive on seeing immediate results and hate to miss out on opportunities. The Risk Taker wants the highest returns possible and expects to be compensated for taking risks. Alternative investments, such as hedge funds and cryptocurrencies usually feature in their investment portfolios, and they will no doubt have high levels of exposure to growth assets like equities. The Risk Taker, however, is inherently prone to certain behavioural characteristics that, when left unchecked, can significantly erode potential returns. Chasing the latest top performers is one example, or switching out of an investment at the wrong time. The Risk Taker does tend to be more actively engaged with their investments, but this can be detrimental if their engagement involves poor investment behaviour. Fortunately, with some self-restraint and patience, achieving greater long-term returns is possible.

Type 3: The Balancer

The Balancer is normally less impulsive than The Risk Taker. They like to look at the whole picture and weigh their options before deciding how to invest. Because of the bewildering array of choices available, they may tend to take a long time to decide. However, The Balancer can narrow down their options by knowing what their investment goals are, as well as their timeframes for achieving them. By their nature, they also prefer to keep their fingers in many pies, to hedge their bets.

As such, The Balancer is often led to create a diversified portfolio of single-asset unit trusts, or as a simpler option, chooses multi-asset or “balanced” funds. The trick with diversifying in investing is to find the right balance – being under or overdiversified can be risky to investment success.

Type 4: The Protector

The Protector prefers to avoid risk whenever possible and likely believes that ‘slow and steady wins the race’.  When it comes to investing, the risk of losing money is probably among The Protector’s top considerations. Stability is the goal, not volatility. As a result, they invest primarily in conservative assets like cash and bonds rather than riskier assets like equities, and in terms of unit trusts, Money Market and Income funds over Equity or even Balanced funds.

Obviously, there are both pros and cons to this type of approach, depending on your investment goals. The pros to The Protector approach include the fact that a more conservative investment portfolio has historically offered more stability and thus a more dependable investment experience than more aggressive portfolios over the shorter term. The cons include incurring higher opportunity costs and achieving lower returns by avoiding equities even when they have a longer-term investment goal, like retirement. 

Which type of investor are you? Knowing where you stand on risk, can shed light on how best to manage your investment journey and reach your investment goals more easily over time.