This is why it is important for everyone to understand their strengths and weaknesses when it comes to investing so they can make better decisions and achieve their long-term investment goals.
According to the CFA Institute, there are four broad categories of investors – Preserver; Follower; Independent; Accumulator – with distinct personality types. It is important to understand that investors can have personality types from multiple categories.
Once investors understand themselves better, they will be less likely to get swayed by sales pitches that do not have their best interests at heart. Similarly, it will enable them to identify the financial planners who take the time to determine their needs, assess their risk profiles and put forward an investment plan that caters to their requirements.
So, which of the profile(s) best represent you?
Preservers are cautious in behaviour in their daily work and personal life.
Like the name suggests, preservers prioritise protecting the value of their investments and are extremely worried about putting their money at risk. This careful and measured approach to guarding their investments enables them to preserve the value of their capital.
However, this aversion to risk, which may limit losses in downturns, often prevents them from enjoying significant upsides in market upswings. Commonly, this behaviour stems from their short-term investment focus in both bull and bear markets.
On the flipside, this characteristic, which places great emphasis on wealth protection, makes Preservers very emotional, namely anxious, hesitant and afraid to make decisions in fear of being wrong. In scenarios of high volatility, they may prefer to stick to the status quo rather than make adjustments to their portfolio – which could have detrimental implications on their long-term investments.
Followers are carefree and trusting in nature and because of that, they should be more careful of people preying on them in their daily lives.
Followers tend to lack knowledge or even interest in investing. Due to this, they often make investment decisions without any real strategy or long-term plan. They are given this name because they do not like to be left out and are drawn to where the action is in the stock market or by media reports. Followers tend to seek investment opinions from friends, family members and "experts" and are easily swayed by new trends in the investment community.
A common issue with this type of investment strategy is that Followers buy into a herd mentality. This behaviour may lead to losses as following professionals and trend setters in the financial markets usually means it is already too late for retail investors to get into the game as valuations would have reached its highest.
In the bigger picture, these investors form the basis of bubbles as they jump on popular investment bandwagons and are usually the ones who suffer the biggest brunt of market crashes.
Another problem for this category of investors is that, because they often make investment decisions without any real strategy or long-term plan and do not derive at investment decisions by themselves, they are easy prey for scammers or unethical financial planners.
Independents are the polar opposites of Followers. They tend to make their own decisions and take charge of their daily lives, whether in business or at their workplace. Independents usually have substantial investment knowledge and take pride in amassing even greater understanding and knowledge. They do this because they want to be in control of their investments.
Independents are critical thinkers who are very analytical, scrutinising each opportunity before investing. This is also because they do not like losing money and want to get the most value.
While Independents seem like the ideal type of investors, they may end up being overconfident. Because they spend so much time and effort analysing and pondering the merits of each investment, they do not expect their decisions to be wrong. Independents may believe their conclusions are always correct and disregard the opinions of others.
Independents are more willing to take on risks if they are backed by logic or even gut instinct. By being more open-minded to the viewpoints of others, Independents can significantly improve their knowledge and re-assess their train of thought.
Accumulators are fiercely independent and have usually tasted success in life which leads them to think they will surely be successful in their investments. The main thing they want out of investments is to grow significant wealth.
They are risk takers who believe the investment path they have chosen is definitely the correct one. It is hard to talk these people out of the decision, whether in life or investment.
Accumulators are also willing to take much larger bets or seek more adventurous investment opportunities because they believe they are smarter and more discerning, and are very confident that they cannot be tricked into shady investments.
A potential downfall for Accumulators is that they can be overconfident of their abilities. Despite all the research and literature pointing to the fact that it is nearly impossible to beat market returns, all Accumulators believe they are outliers.
Another fault of Accumulators is that they tend to make frequent changes to their portfolios because they think they can outdo the average investor and are able to stay ahead of industry trends. As a result, they tend to deviate from any long-term investment plans or potentially lose out on returns by making too many switches.
Knowing Yourself Better
It is important to note that no investor will typically fall in only one of the personalities. Often, you will find that investors display a dominant personality and may have certain characteristics of other personality types.
Knowing yourself is key to improving the way you invest. Not many investors will look at themselves to find weaknesses or acknowledge that they may be doing things in a wrong way. Investors who are able to critically assess themselves will always be able to find ways to improve.