Understanding Investor Type

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.

Most of the time, try to follow a ‘buy and hold’ strategy to build up wealth gradually over time. They look into the long-term growth scope of the market and therefore are less bothered about the up-and-down trend of the short run. 

Trend Followers are the kind of investors who try to squeeze out market momentum, buying securities if their prices are rising and selling if they fall. Often, they do so with the help of technical analysis and market indicators.

Contrarians, on the other hand, being contrarian investors means turning the other way from the market. They usually dig for opportunities that will help them buy those particular types of assets that are undervalued or out of favor, expecting them to reverse the trend. 

Safety seekers prioritize stability and safeguarding their investment capital. They prefer low-risk options that offer steady, albeit modest, returns. Bonds, savings accounts, and blue-chip stocks are popular choices for safety seekers due to their reliability.

Risk seekers thrive on the excitement of investing and are willing to take on higher levels of risk in pursuit of potentially higher returns. They embrace volatility and seek out opportunities in emerging markets, high-growth stocks, and innovative ventures.

Adaptive investors are like chameleons in the financial world, able to change their strategies based on market shifts and new information. They don’t stick to one fixed plan but adjust their approach as needed to navigate changing conditions.

Non-typical investors would display characteristics of passive behavior or contrarian behavior. They might very well end up displaying an element of trend-following behavior at another time or in another aspect of their portfolio. 

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.

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.

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

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