6 Types of Investors - Which One Are You?
Estimated reading time: 5 minutes
From Scrooge McDuck sitting atop his stacks of gold coins to Gordon Gekko yelling “Greed is good,” in the Wall Street films, there are plenty of investor stereotypes. While the stereotypes may be exaggerated, research into how people make financial decisions reveals that there are what might be called “investor personalities.”
Indeed, Richard Thaler just received the 2017 Nobel Prize in Economics for his work in the field of behavioral economics—the study of how psychological, social, cognitive, and emotional factors influence our economic decisions.
A short list of those factors includes your age, gender, profession, career path, and family situation, along with your investment goals and financial challenges. Without going too far into behavioral economics (Thaler has written a number of books, if you’re interested), here are a few investor personalities identified by researchers. Do you recognize yourself?
Two Categories of Investors: Active and Passive
Starting with a high-level overview, the Barnwell Two-Way Model divides all investors into two categories: active and passive.
Active investors have often achieved their own wealth. Entrepreneurs, business owners, surgeons, as well as lawyers and accountants who run their own firms, and self-employed people are often active investors. They like to be in control of their investments, as they are in control of their professional lives. They want to be actively involved in investment choices and financial affairs in general.
Passive investors are people who gained their wealth by inheriting it or by entering into a remunerative professional career. Examples include physicians, corporate executives, and lawyers and accountants who work in large firms. They often started out with student debt or at a lower salary and worked their way up. As a result, they prefer security over risk when choosing investments. They achieve this through diversified portfolios invested in established, brand-name companies and funds.
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Six Types of Investors and Some Related Personality Characteristics
Within those broad categories, researchers have identified several investor types:
1. Busy investors
The busy investors are interested—some might say obsessed—with the markets. They follow the ups and downs of equity, gold, or real estate prices. As a result, they tend to buy and sell frequently, often based on what they see others doing. The day-traders popularized a few years ago, fall into this type. These active investors can also be high rollers, willing to take a chance on market volatility rather than sit it out. They often share personality characteristics with entrepreneurs, for whom financial success is a scorecard.
2. Casual investors
The casual investors are the opposite of the busy investor. Once an investment is made, they tend to let it ride believing that it will take care of itself. These passive investors tend to trust in the advice of their financial advisors. They typically prefer safe investments that have proved their value in the past. Sometimes, their laissez-faire approach to investment is a sign of their optimism that everything will work out well in the end, if you just let things take their course. Besides, there are a lot more fun and interesting things to do than worry about your investments, right?
3. Cautious investors
The cautious investors tend to be the most risk-averse, putting financial security first. They take their time when faced with decisions, preferring to weigh all of the options before choosing. Afraid of making mistakes, their pursuit of the perfect decision can mean making no decision at all. This puts them in the passive investor category. Older investors, who are more interested in safeguarding their resources and have a shorter horizon for recouping losses, often fall into this type.
4. Emotional investors
The emotional investors put their heart into their investment decisions, not their head. For example, they are likely to invest in companies because they use and like the firm’s products, regardless of the stock’s performance, or to hold onto real property in a depressed neighborhood for sentimental reasons. They can be a blend of active and passive in their approach, eager to make investments they feel committed to, but unwilling to let go of those that have outlived their value.
5. Informed investors
These informed investors tend to take a well-rounded approach. They are careful to stay up to date, using a variety of sources to fill in their understanding. While confident of their own financial acumen, they also are willing to listen to the advice of experts, and to act decisively. Often high achievers in their professional lives, they typically have a strong work ethic and may seek the same sense of control and accomplishment in their investments.
6. Technical investors
Technical investors share some characteristics with busy investors, but they tend to analyze the numbers and read the pundits rather than reacting to every market move. They may spend a lot of time on their computer screens, but feel that their diligence is rewarded if they spot a trend earlier than others. Their desire to get an edge on the markets often leads them to buy the latest technology. These active investors are very involved with the management and choice of their investments.
Self-Direction Can Work for All Investor Types
It’s perfectly possible for one person to change his or her investment style over the course of a lifetime. An investor who starts out busily following the markets and trading frequently may relax his approach over time. Once a couple has paid down student debt and the mortgage, they may be willing to take on more risk.
And there are investors who don’t match any of these descriptions. They might be called “average” investors: people who take a balanced approach, are open to a degree of risk, and still want some control over their portfolios.
No matter where you fall on the spectrum of investment types, you owe it to yourself to look into self-directed retirement savings accounts. Active investors appreciate the ability to buy and sell a range of assets—a more diverse array of assets than are typically available through a bank or brokerage house. More passive investors can be secure that once their investment assets have been bought.
Learn more about self-direction in a FREE consultation with a trained professional at The Entrust Group.