What Type Of Investor Are You?
How Investor Profiling Is Changing The Way Investment Advice Is Given
|Over the last few years psychologists have discovered that investors appear to fall into | |'types', and that knowing what 'type' of investor an individual is can feed into improved | |investment gains. Jonathan Myers examines the current state of play. |
| | | | |Every investor is different, with different financial goals, different tolerances to risk, different personal situations and | |different desires. From the point of view of investment management, these characteristics are often defined more rigorously as | |objectives and constraints. Objectives being the type of return being sought, while constraints include factors such as time | |horizon, how liquid the investor is, any personal tax situation and how risk is handled. | |Nevertheless, it's really a balancing act between risk and return, with each investor having unique requirements, as well as a | |unique financial outlook. What must remain constant throughout, however, is the delivery of an investment program that is not | |only specific to an investor's personal needs but that also works well and provides financial security for the future. Within | |these constraints too, there should also be the opportunity to have some fun with investments if clients should so wish. For | |example, by, say, using a small proportion of available funds for dealing in more speculative investments such as technology | |companies or emerging market stocks. | |To this end psychologists have become increasingly involved during recent years in attempting to classify, or provide some sort | |of typography of, different sorts of investor. The assumption is that investors, in one form or another, represent just a handful| |of types, and that then matching the investor to the investment will lead to better returns. | |Besides being useful for clients, investor typographies have benefits for the professional as well. Many discount brokers make | |money on the high turnover of dealing. But as bull markets turn into bear markets, investors may shy away, leaving a hole in | |brokerage commission. Any method that gives brokers a marketing edge, under these conditions, is useful. Additionally, quality | |brokerage houses would love to have this information available as it gives them a way of targeting clients with a range of | |financial products more effectively - including insurance, saving schemes, mutual funds, and so forth. Overall, many responsible | |brokerage houses realize that if they provide an effective service that is tailored to individual needs, in the long-term there | |is far more chance they'll keep their clients through the bad market times as well as the good. | |Yet, though it may be true that investors can be categorized according to a limited number of types, it has also led to much of | |the same ground being covered in the professional and popular literature on the subject; which is to say, most systems embody | |similar types but the names are different. In one source an investor may be classed as 'A "Stay At Home" Investor, while in | |another an investor may be referred to as an 'Inertia Riddled Investor'. Similarly, there may be no difference between a 'Careful| |Investor' and a 'Cautious Investor'. On the other hand, there may be some difference depending on what the researcher had in | |mind. We...
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