When it comes to investing, everyone has their own goals and plans. Some may be investing for retirement, while others are using their investments for income. Whatever the case may be, each investor is different. This isn’t a surprise since each one of us are unique individuals. But knowing what type of investor you are can make you become a better investor. See which type of investor you identify with most below.
Broad Classifications of Different Types of Investors
The largest classification of investors is simply active versus passive. If you are trying to beat the market, you are an active investor whereas if you simply want to earn what the market gives, you are a passive investor. I go into greater detail about these types of investors in this post.
From there, we could also put conservative and aggressive investors in a broad category as well. Conservative investors tend to take on less risk and are more prone to have a portfolio that is invested more in bonds than in stocks.
The aggressive investor on the other hand, takes on a great deal of risk and tends to invest more in stocks. A really aggressive investor will invest mainly in small cap companies and those companies in emerging markets.
Specific Classifications of Different Types of Investors
While it is easy to see us in one of these categories, they are too broad for us to learn anything about ourselves. If we could narrow in on the different types of investors, we might be able to learn where we fall short. Below are 6 additional classifications for investors along with the pro’s and con’s of each.
The saver is someone that fears the stock market. They would rather keep their money in the bank than invest it in stocks. Many savers are like this because they lost a lot of money during the 2008 stock market crash. Their losses stung them enough that they would rather earn a low return on their money, knowing they can’t “lose” it than earn a higher return with the stock market.
- Pro: The good side of a saver is that they are saving money. They are living within their means and are avoiding debt. Should they lose their job or have an emergency hit, they have the money to survive.
- Con: The bad side of a saver is that they aren’t earning anything on their money and are in fact losing money. They are losing in the sense that the statement value of their savings never drops, but rather their purchasing power is declining. With inflation around 3%, savers need to earn this rate just to keep up with rising prices. If a saver is earning less than 3%, the price of goods is increasing at a faster pace than their savings. This in turn is causing them to lose money and potentially not afford to retire.
How do you get over your fear of investing in the stock market as a saver? Some might say to just jump in, but that would cause more harm than good. Instead, savers need to take the slow and steady approach. Find a good mutual fund (you can learn the basics here) and invest $1,000. Then set up a re-occurring monthly transfer of $100 to invest more. Look at something like the Vanguard Star Fund.
If you don’t want to do the research of picking a mutual fund, then the best solution is to take your $1,000 and open an account with Betterment. In 10 minutes you can set up your account and have your $1,000 set to be transferred along with a monthly transfer for $100. When you set up your account, you choose the portfolio – I’d recommend starting with a 60/40 (that’s 60% stocks and 40% bonds) and then sit back and relax.
Whichever method you choose, don’t obsess over the market. Check in on the account every quarter. It will fluctuate, but over the long-term, it will grow in value – both from your investments and the gains in the market. (Note that when I say long-term, I am talking 5 or more years; three months is not long-term.)
This investor is one that knows that they should be investing in the stock market, but just never seems to get around to doing it. It could be because of “analysis paralysis” (too many choices/decisions and feeling overwhelmed) or they might just be waiting for the perfect time to invest, which never seems to come. For example, if the market is going up, they might wait for a pullback. But when the pullback is occurring, they wait until the market starts rising again just to be safe. The cycle just keeps repeating itself.
- Pro: The pro here is that they know that they need to invest in the stock market if they want to be able to afford retirement or even be financially secure.
- Con: The con is obvious – they never start investing so they have no hope of actually affording retirement. They just keep talking themselves out of investing.
The fix is not a difficult one: the best time to start investing is now. If your time horizon is 30 years from now, it doesn’t matter whether we are at an all-time high now or not. The reason is because in 30 years, chances are the market will be higher. Think back in time to big events, like the crash of 1987. People were scared of the stock market then. Is that crash relevant to today’s prices? Not at all. Same thing with the run up to 2008. We have already surpassed the highs from then.
Furthermore, no one can time the market. No one. I know people are predicting a stock market correction, but every day you are not invested in the stock market, you miss out on the power of compound interest. Your focus needs to be on the long-term, which is years away, not what the market is going to do tomorrow or next week.
Finally, if you are procrastinating because you are overwhelmed by the choices, make your life easier and open an account with Betterment. In 10 minutes you will be all set up and won’t have to pick investments or do anything again – they take care of it all.
We all come across gambler type investors in our lives. They are the person that jumps on any hot stock tip regardless who is telling it to him. To them, they only see dollar signs. Heck, I could say that General Electric is working on a new light bulb that runs on air. The gambler is already on his trading account, buying up shares of GE. It doesn’t matter that they lose money either, all that matters is what the next hot tip is.
- Pro: The biggest pro about the gambler is that they are a positive thinker! They don’t care that they lost money, they are always looking ahead to the next big thing.
- Con: The con is that they tend to lose much more than just their shirt on many investments. When the time comes to review their performance, they wonder how they did so poorly and think that the market is rigged against them. They also are short-sighted. They only look at the short-term, hoping to score a big rise in price as opposed to being focused on the long-term.
The fix for the gambler is a little more involved. The gambler needs two investment accounts: a play account and a hand’s off account. Most will never be cured of the gambling mentality, so just telling them that they cannot chase hot stocks won’t work in the long run. They need an account to play around in and then another account where they buy and hold.
This is what worked for a client I worked with at the last firm I was at. The husband was a gambler to the bone. Always trading every day. His wife was the complete opposite, a buy and hold type investor. He tried going cold turkey, but failed after a few weeks. Eventually, we set up a play account for him to trade in and another account for long-term investing.
While this was going on, he would question us as to why his returns were always so low compared to his wife. We kept telling him it’s because you chase stocks and she buys and holds. He refused to listen.
Fast forward about a year after we set up the two accounts and the light bulb went off. His trading account had a return of 1% while his buy and hold account had a return of 11%. He still plays around in the market, but now he has a nice portfolio for the long-term that is securing his retirement.
The technical investor is one who spends his free time looking over various charts of stocks and the markets try to spot trends. Once he believes he spots a trend he invests accordingly to try to make money off of the trend.
- Pro: The pro of the technical investor is that they can make money if they spot a good trend. There are trends all of the time in the market, the problem is that many of them don’t last very long and past performance is no indicator of future performance. In other words, just because the technical investor sees a trend, it doesn’t mean the market sees it or will react in the manner the investor wants.
- Con: The con is no free time! With all of the time spent reading charts, books and manuals trying to beat the market and spot a trend, the technical investor could have been out riding a bike, starting a small business on the side to increase income or spend more time with his family.
The technical investor is wired the way he is. As such, he needs to keep doing technical analysis. So, the solution is the same as it was for the gambler – to have 2 accounts, one for playing around and one for long-term investing. Additionally, the time spent trying to spot trends should be limited so that he can spend more time doing other hobbies.
No, I’m not talking about Bruce Willis or Derek Jeter here, I am talking about ordinary people who invest so they can show off. These are the people that own stocks of the hottest, trendiest companies. Think Apple, Google, Tesla, etc. They have no idea how to invest, they just like investing in what is fashionable at the moment.
- Pro: The pro of the celebrity investor is that they are always on top of the hot things that you might want to pay attention to. In the case of the stocks I mentioned above, many of them are good, solid companies that should be around for a long time.
- Con: The con of the celebrity investor isn’t that they are clueless when it comes to investing, but that they are typically clueless when it comes to their finances in general. The fashionable investments don’t stop with the stock market, this is just one outlet for them. These same people have designer everything, even if it puts them into debt.
The fix for the celebrity investor is to understand that material possessions don’t make a person. It is what is on the inside that counts. They need to learn to love themselves for who they are and realize that buying things is only providing a temporary relief.
The next step is to get out of debt, either by creating a debt repayment plan yourself or using a reputable service like Ready For Zero. Once the debt is paid off, then they can start investing. As with the saver listed above, the celebrity should look into a simple portfolio, like this one, or use a firm like Betterment.
The Straight Arrow
The straight arrow is an investor that follows an investment strategy and who balances out their risk and reward. They have a solid understanding of the stock market and know that they are investing for the long-term.
- Pro: The pro about the straight arrow investor is that they don’t fall victim to the craziness of the market over the short-term. They know that the market rises and falls on a daily basis and that it is unpredictable. But they also know that over the long-term, the trend of the market is up and if they stay invested for the long-term, they will come out ahead.
- Con: There really is no con to how the straight arrow invests. You could argue that they miss the opportunity to earn a higher return by not taking some chances, but that is a stretch. It’s a stretch because what they are doing is a solid formula for successful investing. Therefore, they are better off doing what they are doing rather than try to do something different.
There you have the different types of investors. Regardless as to which category you fall into, the fixes I provide should give you some direction as to how to become a better investor. For more information about investing, be sure to read my step by step guide to become a stock market millionaire (something that most of these different types of investors should do) and check out my eBook, 7 Investing Steps That Will Make You Wealthy. If you are trying to figure out which broker to invest with, check out my online broker comparison chart. Lastly, make it a point to review your investments regularly so you know how much you are paying in fees. Personal Capital is the winner here, with an amazing user interface and wealth of knowledge it provides. Best of all, it’s free!
As always, I am here to answer any questions you might have about investing.
Readers, which type of investor are you? Have I missed any big type of investor?