Similar to the psychological typing theories you may be familiar with, such as the Myers-Briggs type indicator, Behavioral Investor Types (BITs) are models for various types of investor. Knowing your investment type can help you determine what types of cognitive and emotional biases may impact your investment behavior. Knowing these potential pitfalls will help you develop strategies to overcome them, and base your investing decisions on hard data.
This framework has four behavioral investor types: the Preserver, the Follower, the Independent, and the Accumulator. Learn more about each investment type below, and take our quiz to determine your own investor type:
A Preserver is someone who places a great deal of emphasis on financial security and has a conservative approach to investing. You are happy with the status quo, i.e. you believe in preserving your wealth rather than taking a risk for potential gains. Your decisions are connected to how you feel as opposed to how you think, and this reflects in your investment choices.
Preservers, like you, who practice savings behaviors through mental accounting (i.e. saving for retirement, for college funding, paying bills) can accumulate long term wealth as long as you carefully invest in a balanced way across these various mental accounts. Another good sign is that Preservers such as you do not indulge in excessive trading or frequent portfolio changes; activities that have been shown to be detrimental to wealth accumulation in the long run.
On the other hand, you have a high aversion to risk which may affect you during severe market downturns. An example is the 2008-2009 market meltdown during which time some Preservers panicked and sold out after suffering losses, only to see the markets rebound in the ensuing 12-24 months. Although it may seem counterintuitive, during these times investors should consider making risky investments as opposed to selling risky investments. Additionally, your low-risk, cautious approach of sticking to safe investment choices might prevent you from reaching your financial goals in the long term – sometimes cash & bonds simply will not get you there.
Want to learn more about optimizing your investment strategy as a Preserver? Read Michael’s latest book “Behavioral Finance and Your Portfolio.”
A Follower is someone who does not necessarily have a keen interest in the financial markets and usually follows the advice of peers (friends, colleagues, family members) in regard to investment choices. Your decisions are driven by cognitive biases rather than emotional—i.e. they are connected to how you think about the investment choices before you and not by how you feel. You enjoy indulging in the latest investment trends for fear of missing out on something good and as a result you might overestimate your capacity for dealing with risk and losses.
Because investing is not necessarily your topmost priority you do not indulge in excessive trading, which is a positive sign since excessive trading has been shown to negatively impact wealth accumulation in the long run. Low portfolio turnover activity can be a benefit in reducing the volatility associated with your portfolio, which can lead to better long-term compounded returns.
On the other hand, you have a tendency to chase after the newest investment advice or trend suggested by peers – investments that have recently performed well. As a result, you may consider investing in these assets at the wrong time — i.e. when the prices are at a peak, leading to wealth destruction. Educating oneself on the benefits of portfolio diversification and sticking to a long-term plan is the best course of action for Follower investors such as you.
Want to learn more about optimizing your investment strategy as a Follower? Read Michael’s latest book “Behavioral Finance and Your Portfolio.”
Independents like you are strong-willed, analytical, and critical thinkers with often-unconventional ideas about investing.
As an Independent investor, you actively engage in the investment process and do your own research to come up with original ideas on investments. You are realistic and clearly understand the risky nature of certain assets—hence you are more willing than other individuals to tolerate risk in your portfolio. You are not afraid to dive into the details of the financial plan and are comfortable with analyzing the pros and cons of an investment choice (both quantitatively & qualitatively). Given your willingness to do your own research, Independents like you are often contrarian thinkers, which is a good strategy —unlike many investors, you are a thinker and a doer, not a follower or dreamer.
On the other hand, your analytical nature might sometimes work against you—i.e. you may act too quickly without learning as much possible about the investments before making them. As a result, you may leave some stones unturned that could trip you in the long run. Oftentimes Independents can be prone to confirmation bias in doing research—i.e. you might seek information that corroborates your thinking instead of finding information that may contradict your hypotheses. You may cling to your self-generated ideas as opposed to being open to new ideas that may prove they are wrong.
Independents should have regular educational discussions with a financial advisor – clear, well-researched and data-backed dialogues are the best course of action to identifying the right financial plan for you.
Want to learn more about optimizing your investment strategy as an Independent? Read Michael’s latest book “Behavioral Finance and Your Portfolio.”
Accumulators like you are individuals interested in wealth accumulation and are highly engaged, strong-willed, and decisive to follow through with the investment choices confidently.
Having a strong entrepreneurial mindset, you know what it takes to be successful i.e. hard work and determination, and hence, you do not shy from diving into the details and taking the time to understand things clearly. You also understand that building wealth requires accepting risk and that every decision is not necessarily going to work out well; a concept that most other investors do not grasp readily. You confidently rely on your abilities to achieve your goals and this reflects in your investing style as well – you are in the race to win big and are confident & optimistic enough to be in total control of your financial plans.
However, the confident nature of most Accumulators also makes them susceptible to emotional biases that may limit the investment success i.e. you perceive opportunities based on how they resonate with your values and personal affiliations. Overconfidence may lead to increased risk-taking behavior, spending habits and excessive trading activity that may not be prudent. You enjoy the thrill that comes with making a good investment but often this may lead you to chase higher-risk investments while avoiding the basic principles of asset allocation and diversification.
Want to learn more about optimizing your investment strategy as an Accumulator? Read Michael’s latest book “Behavioral Finance and Your Portfolio.”
“Michael Pompian brings something new to the field of behavioral finance books. By combining insights into our fundamental cognitive and emotional biases and investor personality types, he provides concrete, practical action steps to avoid making big mistakes. In classic Pompian style, he does this with efficient, easy-to-read prose. You do not want to make important financial decisions without reading this book.”
—Stephen Horan, Head of Private Wealth, CFA Institute; author, The New Wealth Management