Have you considered what types of investors fit your vibe? Do you have a specific investor personality?
We all have different levels of comfort when it comes to making decisions about money, finances, and investing. Maybe you’re the aggressive growth type looking for above-average market returns, or you sit passively on the sidelines happy to have your money work for you while you focus on other areas of your life.
When pursuing your investment goals, consider how your investor personality plays a role in your investment strategy. Make sure it suits you. There’s nothing worst than making an investment and not being able to sleep at night because you’re pretending to be someone you’re not.
In this quick post, we’re going to explore 12 different types of investors based on risk tolerance, confidence, willingness to learn, and market experience. There’s no one right answer, as it’s all about what works best for you.
The Active Investor
An active investor enjoys keeping a close eye on market trends and takes a hands-on approach with the goal of beating market returns. For some active investors, it’s less about beating the market and more about buying wonderful companies that they enjoy. Active investing doesn’t necessarily require many years of experience, but experience helps.
Active investors like to do their homework. They’re looking for stocks they can keep for the next 5-10 years. These investors know that failing to do the homework can result in a volatile portfolio with significant value losses.
Proponents of active investing love the flexibility and excitement that come with buying individual stocks.
The Passive Investor
Passive investors are focused on returns over the long term instead of timing the market for short-term profits. For investors who are more risk-averse, and prefer to hold assets for the long term, passive investing could be a great fit for you.
Some passive investors prefer to work with a stock broker or financial advisor. Others choose dollar-cost averaging contributions with robo advisors in passively managed index funds, mutual funds, and exchange-traded funds (ETFs), as they provide diversification.
These investments reduce risk by tracking sector, industry, and market returns. Due to lower trading volumes, you can expect lower costs and a lower expense ratio. Studies have shown that passive investors often beat the active ones, once expenses and accounting fees are taken into account.
The Buy-and-Hold Investor
The preferred strategy of Warren Buffett, the buy-and-hold investor style has been proven to provide exponential returns over the long term. Ignoring short-term fluctuations, buy-and-hold investors will aim to hold investments over many years or decades.
Some consider the buy-and-holder to be a passive investor, but this isn’t necessarily true. You have buy-and-hold investors that like to actively manage their portfolio and pick stocks.
Buy-and-hold investors own a range of securities from value, growth, and dividend stocks to index funds, with the aim of investing in quality assets that have strong fundamentals. Portfolios are often diversified to protect against risk and volatility.
The Growth Investor
Growth investors like growth. They’re focused on companies and types of investments that are expected to deliver an above-average rate of return in their industry or market. Big innovative companies like tech stocks can be popular as well as younger companies that are expected to expand and turn profitable.
Innovation is key to a growth investor, where new products and technology are constantly being developed. The majority of investment gains will come from capital appreciation, as dividends are not common for growth companies.
Think about Amazon that started as a book company and Apple that started as a computer company. Both of these companies have completely transformed life. Their impact goes beyond books and a computer.
The Value Investor
Value investors actively seek out stocks that they believe the market is underestimating. They’re not distracted by short-term trends or the latest meme stock. Rather they confidently analyze stocks, looking for mistakes in pricing where companies are undervalued relative to their performance and long-term potential.
Imagine going shopping and finding the shoes you want are on sale. Like any savvy shopper, you know it’s better to buy when you’re saving 30%. Right? Value investors love to find companies on sale in the stock market and hold these companies in the event that a market correction will bring the stock price closer to its true value.
The Dividend Investor
Investors that focus on dividends, prioritize income over capital growth. If you’re approaching retirement or plan to stop working, cash flow from dividends can help you sustain the lifestyle you choose to live.
The dividend investor looks for stable companies that have a track record of paying or increasing dividends, sometimes for over 25+ or 50+ years. These companies are often referred to as dividend aristocrats or dividend kings and are members of the S&P 500. Think Coca Cola, Johnson and Johnson, and Target.
The Conservative Investor
If your investor style falls under the conservative nature, you prioritize the preservation of capital over market returns. Your portfolio is centered around safer long-term investments such as blue-chip stocks, bonds, and money market securities, with a stronger weighting towards bonds and cash, instead of equities.
A conservative investor may have a shorter time horizon until retirement and prefer to devote less time to managing investments, in favor of lower-risk tolerance and stable capital growth accounting for inflation.
The Bear Investor
A bear is an investor with a pessimistic outlook on the market and the belief that the market will decline in the short to medium term. They might actively participate in shorting a stock, in the hopes that the stock price will fall or the company may even go bankrupt.
Others can be found waiting on the sidelines. In reality, the bear investor is more likely to lose money over the long term, by missing out on stock market gains and waiting for the market to crash.
The Bull Investor
The bull investor personality has an opposing view to the bear, where they have an optimistic outlook and believe that the market will go up in value over time. They can sometimes get trapped by market trends where a sudden increase in stock can prompt the bull investor to buy in, with the hope of further price increases.
They can be overconfident and can potentially get trapped in stock market bubbles. Or invest in unique assets such as real estate and collectibles, with the aim of selling for a profit over the short or medium term.
However, there are bull investors who buy stocks because they believe in 15-20 years the company will succeed. Ever heard Warren Buffet famously say, “Always bet on America.” The United States stock market has undergone 38 official stock market corrections with nine bear market declines that take about six months to correct itself.
The Corporate Investor
Also known as venture capitalists, the corporate investor looks for small companies and startups with high growth potential, providing capital in exchange for an equity stake. These investors have a high appetite for risk, as many of the companies they invest in have not yet proved profitability, and at times lack a proven business model where their services or products are successfully sold to customers.
There is a high risk of the company going bankrupt and as an investor, you may lose everything. However, when it does work out, the gains can be astronomical.
The Real Estate Investor
The real estate investor loves real estate. Real estate is often considered a safe investment as historically prices have consistently increased. Some buy properties to rent, flip undervalued homes, or host like an Airbnb.
Real estate investing can be high risk and require capital. So, investors need to do their homework. For instance, does the market rent well. Is the area safe? Will you be able to flip the property and resell it before a market change? Lots of things to think about as a real estate investor.
A new group of real estate investors is focused on investing in real estate through crowdsourcing or REITs (Real Estate Investment Trusts). The risk is reduced for most investors because there is less upfront capital.
The Emotional Investor
Emotional investors can be any type of investor. In fact, they’re almost like an extra personality. It’s the growth investor, who wants to sell a stock every other day or the passive investor who can’t decide which index fund they want to stick with for the long run.
They find themselves getting swept up in the ups and downs of the market quite frequently. Caught up by hype, fear, and trends, their portfolio can seem all over the place, changing allocations regularly or keeping them but not sleeping well at night.
Emotional investors often chase trends and make the mistake of buying at market peaks and selling at market bottoms. Lacking a clear investment strategy, the emotional investor finds it difficult to manage risk and lacks the confidence to stay on course during short-term volatility.
Factors that Determine Your Investor Personality
Many factors determine your investment style. These include your risk tolerance, time commitment, confidence, experience, willingness to learn, and level of engagement.
As an investor, it’s a good idea to see where you fit across these factors, as this will largely dictate the type of investor you are.
However, don’t let this limit you. If you find that you’re wanting to adopt a more growth style of investing but lack the risk tolerance, taking small steps to educate yourself on growth companies and using strategies such as dollar-cost averaging can help.
Regardless of what type of investor you are, you have lots of options to invest your money. Whether you’re investing in a Roth IRA, taxable brokerage account, property, or alternative investments, you need to know your investing style.
Your investor personality has the potential to affect your investment portfolio returns. There may be times where an active investment style outperforms due to market volatility, and other times where real estate may be undervalued and have stronger potential for higher returns. Be prepared to do your homework and figure out who you are in the market.
As market conditions change, it can be valuable to take a hybrid approach, where you get the best out of a mixture of strategies that can help you grow and sustain your portfolio over the long term. As your investment goals evolve with time and your experience in the market grows, your preferred investment approach can be adapted to suit your financial and lifestyle needs. So, what type of investor are you? Comment below.