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Types of investors: Which are you?

People invest for different reasons and work in different ways to reach their goals.

Tags: Investing, Investments
Published: March 13, 2019

Different investment strategies are appropriate for different goals.

Understanding what drives people to invest, the different ways people approach investing and what makes investors successful can help you evaluate your own investor type. With that knowledge, you may be able to find new investment tools you haven’t considered before, or pivot your investing approach as your life and needs change.
 

Why do people invest?

Put simply, people invest to try and grow their money. But the motivations behind investing are more than just numbers.

“There are several reasons that people decide to invest, whether its saving for retirement, saving for their kids’ or grandkids’ education, leaving a legacy or securing financial independence,” says Pamela Dawson, director of advisory business relations at U.S. Bank.

Thinking about why you’re saving can be a good place to start when you’re assessing what type of investor you are. Then, knowing where you are as an investor can help you adjust your strategies as you age and the reasons you are saving change.
 

What type of investor are you?

People’s investing tendencies are usually determined by their age, goals, savings and risk tolerance. These four criteria are the main guideposts for investment planning and can outline the type of investor you are.

 

Are you a risk-taker or do you prefer to play it safe?

How comfortable a person is with risk is a key differentiator.

If people are “risky” investors, they might invest in assets that have a chance of failure but also potential for higher success. These investors tend to be more willing to deal with market changes and volatility.

On the other hand, a risk averse investor is someone who prefers “safer” investments (though all investing carries risk). “It’s more about the return of their money than the return on their money,” says Dawson.

To determine your own risk tolerance, Dawson recommends you consider two things: risk you are willing to take and risk you are able to take. Compare how much money you have to invest against your goals to help weigh how much risk is right for you.

Finding your personal distinction between risk that you are willing to take and able to take could help you evaluate your investment choices. Are you missing out on investment opportunities because of risk aversion, even though you are able to take the risk? Keep both aspects of risk in mind to help you evaluate your investments.
 

Are you hands-on or hands-off?

Not all investors want to spend time managing their own investments.

As Dawson explains, hands-on investors want to be involved in the research and analysis on what they are investing in and the decisions that are made. Active investors tend to have a higher risk tolerance.

The hands-off investor prefers to set up investments and forget about them. Some investors may also take a hands-off approach by selecting passive investments, such as index funds, which are designed to track a benchmark (such as a market index) and don’t require regular maintenance. This is known as passive investing.

Whether you are a “hands-on” or “hands-off” investor, it’s important to seek advice from a financial professional to help you find the right options work toward your goals.

 

Are you tech-savvy or do you prefer a human touch?

Whether you’re an active or passive investor, how you invest may be determined by whether you prefer dealing with technology or people. If you prefer a human touch, a financial professional can help you structure a portfolio.

If you prefer technology and want to manage your own investments, you can use a variety of online tools. This approach may be appropriate if you have some experience with investing or want to remove as many costs from your investing as possible.

For more passive investors who prefer technology, there are automated investing tools available, sometimes called “robo advisors.” These tools ask you several questions about your goals and risk and recommend a portfolio allocation that is then monitored for you. Because automated options are often lower cost, Dawson says they can be a good place to start for people who are just getting into investing or who don’t have a lot to invest.

 

What do successful investors practice?

It’s important to remember that no matter what type of investor you are, there are a few tenets that apply to nearly all successful investing.

  • “First and foremost, you need to have a goal and a plan,” Dawson says. Preparing those two things is crucial to guiding the appropriate strategies for your investing.
  • "Discipline is also very important in investing,” says Dawson. Being disciplined about implementing your plan will help you avoid mistakes.
  • Avoid trading based on emotions or in reaction to market changes, either bad or good, and don’t try to time the market. Patience is key, and as Dawson puts it, “It’s about time in the market not timing the market.”
  • Don’t put all your eggs in one basket. Diversification is a key component of a healthy portfolio by lending some protection from market volatility.
  • Successful investors also know how to be flexible without sacrificing their end goal. Changes in life might mean you need to alter the course of your investment strategies, but always keep your goals in mind.

“Having the right investment strategy to work toward your goals, working with a financial professional to help pick the right options and maintaining the right discipline is how you get to where you need to be,” Dawson says.

When you’re determining what type of investor you are (or maybe adjusting it), keep these principles in mind. Your investment planning can only benefit from it.

 

No matter what type of investor you are, you’ll need to manage market fluctuations. Read 4 strategies for coping with market volatility.