4 types of investors explained
Grayson Rainier, marketing manager at M&G Investments, said there are four types of investors – The Avoider, The Risk Taker, The Balancer, and The Protector.
There are many ways to classify investors to explore the collective characteristics of different investor types.
Classifying investors, he said, can shed light on the strengths and weaknesses of each approach.
The common denominator in the classification of investors is risk.
The risk level associated with investments largely depends on the type of assets held within a portfolio, like equities or cash.
All asset classes have different risk/return profiles, and deciding which to invest in should depend on fundamental factors, such as investment objectives and time horizon.
In practice, investors base this decision on their attitude toward risk and not their fundamental investment goals. In other words, sentiment is driving their choice.
M&G Investments has identified four types of investors based on their approach to investment risk.
The Avoider
The Avoider is someone who likely hasn’t started investing yet. They might think investing is too complicated and feel overwhelmed by the number of investment options.
They might think it takes too much time to start investing or that something could go wrong, and they could end up losing their money.
The Avoider stands out from the other investor profiles in that investment risk is not the primary driver behind their investment decisions.
Instead, their lack of knowledge and fear of losing money often prevent them from making the time to get started.
The Risk Taker
The Risk Taker approach to investing is much the same as they approach life. They tend to be less long-term oriented and more focused on short-term gains.
They thrive on seeing immediate results and hate to miss out on opportunities. The Risk Taker wants the highest returns possible and expects to be compensated for taking risks.
Alternative investments, such as hedge funds and cryptocurrencies, usually feature in their investment portfolios and have high levels of exposure to growth assets like equities.
The Risk Taker is prone to behavioural characteristics that, when left unchecked, can erode potential returns.
They are more actively engaged with their investments, but this can be detrimental if their engagement involves poor investment behaviour.
The Balancer
The Balancer is less impulsive than The Risk Taker. They look at the whole picture and weigh their options before deciding how to invest.
Because of the array of choices, they take a long time to decide. The Balancer can narrow their options by knowing their investment goals and timeframes.
They also prefer to keep their fingers in many pies to hedge their bets.
The Balancer typically creates a diversified portfolio of single-asset unit trusts or chooses multi-asset or “balanced” funds as a simpler option.
The Protector
The Protector prefers to avoid risk and believes that slow and steady wins the race. The risk of losing money is among their top considerations.
Stability is the goal, not volatility. As a result, they invest in conservative assets like cash and bonds rather than riskier assets like equities.
They also prefer money market and income funds over equity or balanced funds.
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