Common Investor Types

Investor type helps advisors better understand how clients behave when the market goes up and down. Adapted from the research by Dr. Andrew Lo from MIT, a mini questionnaire assigns an investor to one of the following categories.

A Typical Passive Investor

A typical passive investor believes in buy and hold. They tend to do nothing when the market goes up or down, and they don’t check their portfolios very often.

Hence they will choose A for Q1, B for Q2, D for Q3, B or C for Q4.

About 35% investors are passive investors.

A Typical Trend Follower

A typical trend follower tends to chase market trends, buying when the market goes up and selling when the market goes down. Hence they will choose B for Q1 and C for Q2.

While momentum trading strategies are common for professional asset managers, retail trend following investors tend to be driven primarily by the (common!) emotions of greed and fear, and mis-perceptions of market risk. During the bull market, investors’ perceived market risk is often lower than what it actually is. During market turmoil, investor’s perceived market risk is often higher than the actual risk.

During the market turmoil during the pandemic (early 2020), they would have sold before and right around when the market hit the bottom.

They tend to check their investments often. But if they are busy, they may not.

About 27% investors are trend followers. They tend to need more hand holding.

A Typical Contrarian

A typical contrarian tends to go against market trends, buying when the market goes down and selling when the market goes up. They will choose C for Q1. During the bull market, they would either sell or go for the ride for a bit longer. During the market turmoil in early 2020 (during the pandemic), they would have increased their allocation to stocks.

They tend to be disciplined investors. Only 8% of investors are contrarians.

Non-typical Investors

A non-typical investor is someone who exhibits conflicting behaviors. Here are a few examples:

  • If an investor shows the traits of a typical passive investor for the first three questions, but check their investments daily or weekly.
  • If an investor shows the trait of a contrarian in Q1 and Q2 but passive investor in Q3, the investor will fall in this category.

Non-typical investors can be sophisticated investors, or beginner investors.

Additional Investor Types

Scroll down for complete mapping table.

How to use investor type?

A client’s investor type has a major impact on the advisor-client relationship; hence it is part of the “Risk Tolerance Plus” flow, the first priority to give to clients.

You can use it to screen prospective clients. Trend followers, for example, require more handholding and may not be a good fit. It also helps you customize conversations with existing clients.

How are investor types correlated with behavioral biases?

While investor type and behavioral biases are each independently assessed, there are some correlations. For example, trend followers tend to believe that they can time the market, which shows overconfidence in their capabilities. They also tend to have herding, another common behavioral bias, although they may not recognize it themselves.

Mapping to Investor Type

This table summarizes the mapping from the answers to each question to the investor type.

Investor Type Description Typical answers to the questions % of Investors
Passive Investor Believe in buy and hold. Do nothing during market ups and downs. Often invest in index funds. Don’t check investments often.  A for Q1, B for Q2, D for Q3, B or C for Q4 35%
Trend Follower Tend to chase market trends. Buy when the market goes up, sell when the market goes down. May check investments frequently.  B for Q1, C for Q2, A or B or C for Q3, any for Q4. 27%
Contrarian The opposite of trend follower. Sell when the market goes up, and buy when the market goes down. C for Q1, any but C for Q2, E for Q3, any for Q4. 8%
Safety Seeker Value safety over anything else; sell when the market has too much upside or downside. Often have unrealistic return expectations (be sure to discuss it). B for Q1, A or B for Q2, A or B or C for Q3, any for Q4. 19%
Risk Seeker Seeking risk. C for Q1, C for Q2, E for Q3, any for Q4.
Adaptive Investor Willing to stay put during short-term fluctuations but adjust for large market trends A or D for Q1, A or D for Q2, A or B or E for Q3, any for Q4.
Other (Non-typical Investor) Inconsistent investment behavioral patterns. More below. Combinations that don’t match above.

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