What type of investor are YOU?
Before investing people should decide on their investment level zone by asking the question, what type of investor am I?
How to decide what kind of investor you are and where you sit on that spectrum?
• Decide on your time horizon - the more time you allow to your investments the more time you have to benefit from compounding, so the less you worry about short-term loss.
• How do you react to loss or volatility? Volatility means unstable, which can be unsettling to final performance, so the question is, how would you react or feel if your portfolio dropped.
• How often do you check your portfolio? This gives an indication of how ‘worried and nervous’ you might are as an investor.
• How much knowledge do you have of financial markets? This will be key in the understanding of your investments.
• Your wealth, if you have many assets such as properties with no mortgages you can afford to take more risk with money that only represents a small proportion of your overall wealth.
Why is this question so important, it’s because aspects such as your goals, attitude to risk and reaction to losing or making
money, influence which investments are right for you.
Without considering this properly, you could end up invested in areas which lead you to sleepless nights from growing risk or
missing out on opportunities which would have increased your wealth.
We look at five different types of investor profile to help you understand and decide which type of investor you are.
The conservative investor
The most important thing to this type of investor is protecting their money. They want to invest to earn a better return than the
one that they would get on cash, but they are happy to give up any prospect of the highest possible returns in exchange for not
losing their money.
There are many reasons why people invest conservatively; they could be older investors protecting their pension while they draw on it or younger investors who don’t want to take too much risk with their limited and hard-earned savings.
The focussed investor
This level of investor is one who is willing to take more risk, but protecting their wealth is still very important. They are willing to
try new ideas and approaches to make money but will stay on the side of caution, in the knowledge that their investments are as secure as possible.
The focused investor pays close attention to their every move, which means they are willing to persevere with their investing
approach and not get deflected by any set-backs. They plan to grow their wealth and approach this methodically and carefully.
The driven investor
The driven investor has a clear plan from the start; they are very businesslike in their approach. They know what they want and
will have carefully assessed why they are investing and the benefits of doing so. Their plan will be ensuring they get the best
mix of investments to get them exactly where they want to be in the shortest possible time, even though they appreciate investing is longer term.
The driven investor may be willing to take more risk for higher rewards, but they will need to know clearly why they are doing
this and the risk levels.
The exploring investor
This is the ‘trial and error’ investor with an inquiring mind.
They have taken an interest in investing and are willing to try new things to grow their wealth, so that they can find out what works best for them,
The exploring investor knows that investing is long-term and this idea gives them time to head off down different investing
avenues. Like any good explorer they should have a contingency plan to go with that open mind and must still carefully weigh up any risks they decide to take.
The adventurous investor
The adventurous investor is one most likely to make investment decisions that require a big leap of faith.
This investor has a back up of cash which allows them to be more ‘gun hoe’ and can therefore take more risk with their
investments, safe in the knowledge that if it doesn’t work out they still have cash to fall back on.
They are the investors most likely to be willing to buy into things that require a gut feeling and not much else.
This could be the unloved asset class or sector that is low in value which others are shunning or it could be buying on the markets’ downturns in the belief that long-term this can be an opportunity to invest where others fear to tread.
The adventurous investor knows that investing is not about gambling and will still consider each play carefully.
How can investors match their investment profile to their attitude to risk?
Many investors will adjust the composition of their portfolio based on the investor profile. In practical terms that means adjusting the weightings of higher risk assets, such as equities and commodities etc with lower risk assets, like
government bonds and cash etc.
The exposure to risky assets varies based on how comfortable an investor is with risk, fund managers are able to set a target
level for each profile. They also look forwards and backwards.
By looking at a range of risk metrics, including volatility and draw down, portfolios can be based on forecasted returns and
historical metrics of risk.
Diversification and time is the key
The challenge for investors is to have a well balanced portfolio. When a lot of people in the UK invest they have a single stock, or just a handful, which means they’re very reliant on one or a few companies and can experience quite a lot of volatility.
The extreme is to hold a lot of funds; this adds complexity, increases the charges and ultimately doesn’t do much to help
Investors seek higher potential returns, which mean taking more risk, so you need to figure out where you sit on that
spectrum and what is comfortable for you. The best defence is to give yourself the longest investment time possible.
The value of your investment and the income from it can go down as well as up and you may not get back the original
amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are
subject to change and their value depends on the individual circumstances of the investor. Please contact us for further
information or if you are in any doubt as to the suitability of an investment.
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