Your Investing Personality & Investment Style Matter!
Your personality determines the type of person you are. It influences how you think, how you feel, and how you behave.
If you are trying to improve or develop any area of your life, it therefore pays to have a good understanding of the type of personality you have. Nowhere is this more true than with your personal finances and the financial investments you make.
Put quite simply, your personality can determine whether you are likely to be rich, or whether you are likely to be poor. Whether you are able to sustain and grow the wealth you build, or whether you rapidly lose the riches you accumulate.
So if you want to become a successful investor, then taking the time to determine your investing personality can really help to achieve that aim.
The Major Investing Personalities
Although no two people are alike, we can broadly group investors into two main groups based on their dominant financial personality: The Conservative Investor and the Aggressive Investor.
These groups, which we will cover later on, can then be subdivided into more specific categories to gain an even better understanding of how you are likely to invest in financial markets.
The Conservative Investor
A conservative stock market investor is someone who values safety and stability over risk. As a result, they tend to be cautious with the investments that they make, only putting their money into tried, true and tested forms of investment.
Conservators investors invest with a long-term perspective, and so usually stay away from short-term investments that promise to provide quick returns on their money.
The conservator investor will look for companies that have a proven track record and which show an upward trend in terms of growth, even if that growth is occurring slowing.
Such companies are therefore usually large-cap companies that have a market capitalization, or market cap, exceeding $10 billion, and the bigger the company is, the safer it is considered to be.
This is especially true for companies which are the leader, or one of the leaders, in their industry, as these generally have the most staying power and so represent the least risky form of long-term investment.
The main characteristics associated with this type of investing personality could best be described as head over heart, as such investors make their decisions based upon detailed analysis of historical performance and so tend to take their time learning about something which they wish to invest in.
As a result, conservative investors do not rush into things, and only invest their money in things they have a good understanding of, or which are considered to be of very low risk, such as index funds, government bonds, certificate of deposit (CDs), traditional interest earning bank savings accounts and possibly income earning dividend stocks.
The Aggressive Investor
The aggressive investor is someone who sees value in, and is willing to take, higher risks with their money for the possibility of higher returns.
As a result, they are much more willing than the conservative investor to put their money into new or untested forms of investment, and so tend to focus on making short-term investments that will give them a high rate of return in a short period of time.
When deciding on which stocks to invest in, the aggressive investor will look for companies that offer a superior good or product than the competition such as through new technologies, ideas or innovative methods, companies that have the potential for rapid growth and/or are new or start-up companies whose performance has not yet been proven.
This investing personality therefore tends not to like dividends, as they prefer to reinvest their money into a company with the aim of spurring further growth.
Unlike the conservative personality who usually goes for large-cap companies, the aggressive personality favors small-cap companies that have a market cap size of $100 million–$1 billion.
New and small companies are considered to be the best form of investment as they hold the potential for the largest and most rapid rate of growth, although this investor will typically not exclude larger companies that are considered to be of good value as a result of an upcoming future trend.
The main characteristics associated with this type of investing personality could best be described as “in it to win it”.
They see the stock market as a way to make large amounts of money within a short period of time, and so tend to have a very wide and diverse investment portfolio.
The aggressive uses market timing to sell stocks during highs and to buy stocks during dips. As a result, they pay close attention to financial news so as to quickly detect changes and trends in the market.
Some, although by no means all aggressive stock market investors, can react to market changes based more on emotion than logical reasoning, which can then result in them “jumping on the bandwagon” and making poor investment decisions that later lose them money.
Typically, the aggressive personality is a frequent trader, sometimes even a day trader, investing in growth funds and sectors funds with stocks held for a period of one year or less as dictated by market forces and movement.
Other Investing Personalities
What we have just described are two broad types of investing personalities. There are, of course, more specific types of personalities that can affect the investment decisions a person makes. Some of these other personalities are listed below:
1) The Even Steven
A person who wants to get even tends to be driven primarily by emotional forces.
For example, if they make an investment which turns out badly they will try to recoup the money they have lost with their next stock trade. Once they have accomplished that goal, they will then sell their stock. Hence, the name “Even Steven”.
This, however, leaves them vulnerable to selling at the wrong time and possibly losing out on benefiting from higher stock value if they had held on for longer.
2) The Free for All
The free for all personality sees all stocks as being fair game. They purchase whatever they feel will give them a good return on their money, and tend to buy many stocks in short succession without fully researching their investments.
Although this type of strategy can at times work in their favor, more often than not it leads to financial ruin as a result of suffering large losses.
Typically, most free for all personalities tend to be young, inexperienced and novice investors who want to make as much money as they can in the shortest period of time.
3) The Bull
The bull does well during bullish markets but falters during bearish markets. They select stocks based on hot news tips, and are strongly influenced by what other people are buying.
Their reasoning is that if someone who they perceive as being credible recommends a stock, then they can quite safely purchase it without having to research the fundamentals themselves.
During bearish markets, however, their lack of independent research is exposed as their stocks rapidly fall in value. A good example of bull personalities can be found with the dot-com craze during the early 2000s.
Many novice investors chose to invest in internet companies without fully researching them first because they were a popular form of investment, but then ended up losing a lot of money when the dot-com bubble burst.
4) The Quality Seeker
The quality seeker personality is best described as someone who is able to practice a considerable degree of long-term patience and self-discipline.
They look for companies with sound fundamentals that hold the potential for long-term stable growth, and are also currently undervalued and unrecognized by other investors.
In the long run, this persistence usually pays off, but they may have to wait many years before they benefit from the investments they have made.
5) The Bystander
The bystander wants to make money by investing, but at the same time does not have the time, energy or motivation to research investment options for themselves.
As a result, they tend to rely very heavily on professional investors to make their decisions for them, or choose investments that require minimal effort to maintain such as index funds, index exchange-traded funds (ETFs) and target date mutual funds.
If financial investors are relied upon too heavily this can expose the bystander to a large amount of risk, especially if they are investing in something which they have little knowledge of.
6) The Braveheart
The Braveheart is someone who is confident enough in their knowledge and abilities to invest in companies which most people have written off as being worthless.
They like to act independently, go against the crowd, and make what others may regard as being overly risky or foolish decisions.
The results they get are largely dependent upon their abilities, and so those who are deluded about their abilities are unlikely to ever see significant returns on their money.
7) The Scaredy Cat
A scaredy cat runs away at the first sign of trouble as they are easily disturbed by short-term market changes. As a result, at the first hint of something going bad they will sell their stocks for fear of suffering a large loss.
This type of personality also tends to be very suspicious and distrustful of investment advice, and so typically, only chooses to invest in something which they have spent a long time researching.
As this investor personality is primarily driven by the fear of loss, their eagerness to sell can make them vulnerable to short-term fluctuations that they would have been better off staying put and seeing through.
8) The Speculative
Speculatives are usually professional traders who are comfortable dealing with large amounts of money in what others would consider to be a risky manner.
They try to control the way certain that stocks perform through buying and selling stocks with other like-minded investors.
This type of personality therefore aims to make large profits in a short amount of time, but by doing so, also runs the risk of suffering from large losses in a short amount of time.
9) The Sentimental
The sentimental personality holds onto their investments rather than selling them when they could have done so for a large return.
This is because they attach great sentimental and emotion value to their assets, seeing them as a part of themselves and as something which they are unwilling to let go of.
Most sentimental stocks, for example, are stocks which a person has received from a family member or which they have owned for a long period of time.
Of course, if the sentimental decides to hold onto their stock indefinitely, they could end up never benefiting from it at all. This type of personality is therefore more of a collector rather than a true investor.
10) The Steady Eddie
The steady Eddie only invests in companies that they have spent a long time researching and have a good degree of knowledge about. They are confident in the investments they make, and typically hold onto their stocks for the long-term.
During this time they stay focused and are not distracted by short-term ups and downs in the market, which ultimately allows them to experience more gains than they do losses.
Personality Traits of Successful Investors
Understanding investing psychology really comes down to an understanding of human psychology, because ultimately, financial markets are driven by other investors just like you, the decisions they make, and how they react to factors which affect financial and economic performance.
You can therefore give yourself the best chance of making successful investments, by developing traits that increase your likelihood of achieving success and removing the traits that don’t.
Successful investors, for example, tend to make rational decisions rather than emotionally based decisions.
When emotions are used for decision-making, this can very often result in a person jumping headfirst into an investment without fully researching what they are jumping into.
This, of course, can very easily lead to poor investment decisions, and so should be avoided if you wish to do well in the long-term and build up wealth that’s sustainable over time.
Successful investors are also willing to take on some degree of risk, because without taking on risk, the amount of returns that you can realize on your investments will be limited.
However, taking on too much risk is a sure way to put yourself into a difficult financial situation, and so successful investors tend only to take on risk that represents an amount of money which they can afford to lose and which won’t adversely affect their standard of living.
Those who take on more risk than they can afford usually end up crashing and burning, and very quickly putting an end to their stock market career.
Another trait of successful investors is that they are well aware of their current level of knowledge and ability, and so are also aware of their limitations and shortcomings.
As a result, they tend to focus on their strengths by investing in companies which complement their existing knowledge and skills, and improving their weaker areas before investing in less complementary businesses.
This also helps them to maintain a realistic outlook on the performance of their investments, and helps to avoid overconfidence that could lead to unwise investment decisions.
Developing the traits of a successful investor is something that takes time and experience, but if you can keep the points in mind that have been raised in this article, you should eventually find financial investing a very fruitful endeavor! Good luck!
Reviewed – 25th March 2016