We are all unique when it comes to our style of investing and anything else. However, it can be helpful to understand some typical investor personas that most people fit in broadly. Because some aspects of those investor personas can lead us to make mistakes and poor decisions when we’re aware of our own investor persona and its pitfalls, we can better control our behavior and decision-making so that we can be better, more successful investors.
We’ll touch on behavioral risk as it relates to investing and then take a look at some typical investor personas.
The Biggest Risk To Your Investments
The most significant risk to your investments isn’t a pandemic, the person in the White House, economic instability, bubbles, fees, or anything of the sort. The most significant risk to your investments is you. Emotion often influences our investing decisions; greed, panic, fear, exuberance. And making any decision, investing or otherwise based on emotion, can often result in mistakes.
A whole field of research sprung up around understanding and thwarting emotion-based investing decisions; behavioral finance. The field has identified some common types of behavioral risk.
Overconfident investors think they have more control over their investments than they actually do and are better at spotting good investment opportunities than other people. This cockiness leads them to take risks that can hurt their investments and really hurt their long-term investing.
Imposters think their successful investment decision are not the result of their own research or skill but blind luck or some other factor that has nothing to do with them. This self-doubt can paralyze them from pulling the trigger on a sound investment.
Fear of Loss
As investors, we are more afraid of a loss than we crave returns. This fear can lead us to make a risky decision in the often mistaken belief it will help us avoid a loss.
Panic sets in when the market starts to plunge. People panic and start selling at the bottom of the market.
Greed-based investing decisions can be dangerous. We’re all investors because we want to make money, and while we know that something that sounds too good to be true almost certainly is, that greed can overtake our common sense.
People who invest in what most of us could see are Ponzi schemes are the prime example. The numbers were so good as to be impossible, but greed kicks in, and people don’t heed the danger signs.
FOMO is fear of missing out. We hate to think we will miss the next big thing, so we make investment decisions based on this fear rather than sound information.
Now that we have some understanding of behavioral risks, we can take a look at some common investor personas and see if we recognize ourselves in any of them. By understanding risks and our own motivations, we can better take emotion out of our investing decisions.
Guardians have a long-term, hands-off approach to investing. They can block out a lot of the noise, the dire headlines, the screaming TV talking heads crying that the sky is falling, that can invoke fear of loss and panic. Guardians prefer automatic contributions or distributions and portfolios with a structure that follows an investment model and an investment policy statement.
Guardians are pretty ideal investors, but they can sometimes be a little too risk-averse which may cause them to not be taking enough risk to meet their dreams.
Chiefs rely on their intuition to make investing decisions. If this intuition has been honed by years of quantitative research, it may be somewhat reliable. But even a small winning streak, fueled by a honed instinct or pure dumb luck (which a chief will credit to their incredible instincts), can lead to overconfidence and taking too much risk. Chiefs like the portfolio structure that aligns with the Guardian, but are usually willing to take a little more risk. They are willing to have a portion of the money invested in growth stocks that may be more volatile, invest in real estate, or even start and run a business.
Analysis by paralysis, Inspectors love to take a hands-on approach to investing; what is tedious, if necessary, research to most of us is a fun hobby for inspectors. They do plenty of research but tend to suffer from confirmation bias, so the information they seek out may not be reliable or objective enough to be useful. Sometimes their research and analysis can be costly because they can’t make a decision. Inspectors suffer FOMO big time!
Outlaws love to take a hands-on approach to investing. Sometimes too hands-on. Outlaws are willing to take risks, but it typically doesn’t pay off in the long run. Outlaws try and time the market, invest in penny stocks in hopes of getting rich overnight, pursue investment decisions based on something their relative or neighbor said, and deviate or even abandon their financial plan and investment policy statement.
Awareness is Power
I think most of us can see little bits of each investor persona in ourselves, past or current. But most of us will be able to most identify with one and knowing which investor persona most fits can help us avoid mistakes that hurt our investments.
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